Thursday, February 24, 2011

Length of Employment - Self-Employed and Commission Income

Self-Employed Underwriting Guidelines

• A borrower who has a 25% or greater interest in a business is considered self-employed
• The borrower must be self-employed for a minimum of 24 months to count income
• However, if the borrower has between 12 – 24 months of self-employed income AND previously earned the same amount or more in a similar position, the income may be counted
–Example: doctor was formerly paid a salary by a hospital and for the past 12 months has owned his own medical practiceEarnings trend must be stable or increasing

How is Self-Employed Income Calculated?

• Earnings trend must be stable or increasing
• Net income (as shown on tax returns) is averaged over the past two years
–Example: if the net income in 2009 was $20,000, and the net income in 2010 was $40,000, then average income used for qualifying for the loan is $30,000
• The following expenses are added back to the borrower’s net income: depreciation, depletion, amortization, casualty losses, and if the borrower is a sole-proprietor (files taxes with IRS Schedule C), business use of a home

Commission Income Guidelines

• Commission income is averaged over the last two years
• 12 – 24 months of commission income may be acceptable, provided the loan application shows there are positive factors indicating the commission income will continue
• If 25% or more of the borrower’s income is from commission, their tax returns must show a full 12 months of commission income
• Income must be stable or increasing from one year to the next
• Non-reimbursed business expenses must be subtracted from gross income

Important Note

Underwriters have a great deal of discretion in determining whether income is acceptable.
Don’t assume income can or cannot be used before talking to a competent lender.


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