COVID, Income, and Loan Qualification

Let’s review some basic requirements on income if you do decide to seek a refinance or also to purchase a property. Government regulators are not dumb, and the folks at Fannie Mae and Freddie Mac are constantly monitoring the economic situation and tweaking the steps lenders must complete to ensure every loan funded meets the guidelines. Alan Van Zee of Hawaii Mortgage Company, Inc provides the following guidelines to follow.

If you are one of the lucky ones to be employed, either you weren’t impacted because your employer has an “essential” business, or maybe with the easing of restrictions you are now going back to work, lenders are required confirm if your current hours and pay differ from pre-covid times. Since underwriting is based on tax returns and W2’s your current pay stubs and a telephone verification of employment will be scrutinized to make sure your current income qualifies you for your loan. If you are unemployed or getting furlough pay, those sources of money are not considered income, and can’t be used to qualify.

Self-Employed borrowers are being scrutinized harsher. It makes sense, because as an employee for a company, underwriters don’t review the viability of your employer’s company. But in the case of the self-employed borrower, even if they paid themselves regular pay checks, the underwriter has to see if the company is affected by the disaster to our economy. To accomplish this, self-employed borrowers are now required to provide updated Profit & Loss statements, along with business bank statements. The underwriters review these documents to look for corroborating data. If your P&L statement shows your business had $10,000 in gross revenue in May 2020, your business bank statement for the same period should show $10,000 in deposits. It is important to note for you self-employed people out there that government stimulus money such as PPP does not count towards your income.

With all of the above in mind, how do you know if you qualify or not? That’s where having a straightforward honest conversation with your Loan Officer comes in. There’s nothing to be embarrassed about. It is always better for you Loan Officer to know exactly what your situation is. That way you can work together to see if your financing will become an issue or not. If you are looking to refinance a Loan Officer may say you look good on paper due to savings and past income but in reality, if your business is dead in the water because of being laid off or your job is considered non-essential, it will be difficult if not impossible to get a loan. Living off savings right now does not permit refinancing.

In summary, talk with your lender and be upfront first before trying to purchase or refinance.

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