Analyzing Individual Tax Returns
When a lender looks at the tax returns of someone who works for themselves, they’re not just looking at how much money the person made. They’re looking deep into where this money comes from and how regularly it comes in. It’s important for the lender to see that the money a self-employed person makes is likely to continue coming in the future. This means they can’t count any money that doesn’t seem like it will keep on being earned. But, they should count money that keeps coming in without big changes expected.
For income to be considered stable and likely to keep coming, the person applying for a loan shouldn’t have any big changes in their job or income on the horizon. Their work history should be steady without big breaks or drops in income. Also, if they’re making money from a contract that’s not just an “at will” agreement, this money should be expected to continue for at least three more years.
Examples of Stable Income
Stable income examples include regular paychecks, bonuses or commission that’s regularly earned, interest from investments that aren’t being sold off for the mortgage, and money made from running their own business.
If there’s a one-time big expense that lost the person some money, this shouldn’t be counted in figuring out how much money they make. So, when deciding if the person makes enough money to qualify for a loan, the lender will not include these one-time big losses.
Recent Related Announcements
There are updates and new information that relates to how lenders should look at tax returns. For the latest on this, see the announcement from June 05, 2019, titled Announcement SEL-2019-05.
References
For more details, visit General Information on Analyzing Individual Tax Returns of the Fannie Mae Selling Guide.