Articles

Richard Swan
Mortgage Investors Group
(865) 742-3384
NMLS#180260/TN#108459
Meeting underwriting conditions during the COVID-19 pandemic could be challenging
for some borrowers. Here’s what you should expect and how to know if now is the time
to buy.
Lenders are faced with uncertainty about actual year to date income for individuals and
borrowers in this world of shutdowns and reduced capacity guidelines that may affect
many businesses. If you are a W-2 employee who shows the same year to date income as
last year, then you shouldn’t have any problem qualifying, or at least no problem with
your lender calculating your income. If however, you are a business owner, or self-
employed and don’t receive regular paychecks then you very easily may have trouble
qualifying.
In the past, lenders looked at a two-year history for self-employed and commissioned
only borrowers. They then took your year to date income (if you receive paystubs) and
extrapolated out estimated earnings for the current year and verified that it was consistent
with, or better than the previous years. With the advent of COVID guidelines for
businesses being deemed to be ‘necessary’ or not, this has left a lot of self-employed
business owners in a lurch for proving that consistency in income that underwriters
demand.
What might the process look like if you try to qualify while your business has been
shuttered for all or part of the last 5 months?
Most likely your lender is going to ask for alternative documentation to prove that what
you say about your business having had no negative effect from the quarantine is actually
true and they will ask for additional information to back up that statement; just in-case
they are audited or if the loan goes into foreclosure.
What might that alternative documentation look like? It may be a letter from a CPA that
processes payroll for your employees, or that balances your accounts either monthly or
quarterly. It may be requesting the last 6 to 12 months of bank statements so that they
can see income flow and document consistency in deposits and regular balances. In past
times, we would have requested a P&L (Profit and Loss Statement) showing your year to
date projected income, but the lending process, by its very nature, suspects that everyone
is trying to commit fraud and our job is to prove that they are not. So, in addition to that
P&L lenders are going to ask for third party verifiable proof that the numbers you show
are legitimate. When a lender has told you that your income is not sufficient at this time
to qualify you for a loan, the next question you will ask is, “Well, when can I buy a
house?”
The answer to that question is somewhat harder to determine because we don’t know
what lenders are going to be thinking a year or two years from now. Once this pandemic
comes to an end, things will begin to get back to normal, but we will still have lingering
effects that will apply to self-employed borrowers. If 2018 showed you made $80,000
and 2019 showed that you made $90,000 then an underwriter looks at that as stable
income and that the income is increasing. If at the end of 2020, your income drops to
$45,000 but you are still in business and feel as if you are going to make it without any
long term effect, that is great news but the underwriter is going to look at that as if your
income is falling and they will want additional proof that you are going to get back to
your 2018 and 2019 income levels. Most likely they are going to want to see an
additional tax year (2021) income statement to prove that you are past the effects of
COVID during 2020. They will also insist on averaging in 2020 as a part of your income
as a precaution.
Self-employed borrowers have always had a little tougher time proving their income for
two reasons. The first is that they are not employed by a company that pays them to
show up for work, and the second is that underwriters suspect that they may try to lie
about their income in order to qualify for a larger loan. We will get back to ‘normal’ in
underwriting for self-employed borrowers but most likely if you show a loss, or reduce
income this year it will affect you for several years to come.
As lenders, we hope that everyone makes it through COVID safely and that the world
does get back to normal quickly, until then we are here to listen to you and do the best we
can to help you keep going with your life while we maintain the integrity of the lending
process so that we don’t create worse problems and a bigger economic loss down the
road.
If you have any questions about your credit, or want to discuss specific home loan
opportunities, call me for more information at:  865-742-3384. Richard Swan, NMLS
#180260/TN#108459