When determining the appropriate qualifying income for a self-employed borrower, it is important to note that business income (specifically from a partnership or S corporation) reported on an individual IRS Form 1040 may not necessarily represent income that has actually been distributed to the borrower. The fundamental exercise, when conducting a self-employment
income cash flow analysis, is to determine the amount of income that can be relied on by the borrower in qualifying for their personal mortgage obligation. When underwriting these borrowers, it is important to review business income distributions that have been made or could be made to these borrowers while maintaining the viability of the underlying business.
This analysis includes assessing the stability of business income and the ability of the business to continue to generate sufficient income to enable these borrowers to meet their financial obligations.
Factors to Consider for a Self-Employed Borrower
Any individual who has a 25% or greater ownership interest in a business is considered to be self-employed.
The following factors must be analyzed before approving a mortgage for a self-employed borrower:
- the stability of the borrower’s income,
- the location and nature of the borrower’s business,
- the demand for the product or service offered by the business,
- the financial strength of the business, and
- the ability of the business to continue generating and distributing sufficient income to enable the borrower to make the payments on the requested mortgage.
For additional information, see B3-3.2-01, Underwriting Factors and Documentation for a Self-Employed Borrower.