By Kelly Overgard, Mortgage Loan Officer, NMLS #1610871
Kevnik Mortgage*, NMLS #1639268
COVID-19 has dominated headlines and impacted almost every facet of daily life around the world. While all of us have endured lockdowns and restrictions, business owners are facing unprecedented financial challenges.
The Paycheck Protection Program (PPP) loans have been a lifesaver for some businesses, but when will the impacts to businesses end? More importantly, why are more and more self-employed borrowers denied mortgage financing?
First off, the definition of a self-employed borrower is a Sole Proprietor (Schedule C) or someone who owns 25% or more of a Partnership (IRS Form 1065) or an S Corporation (IRS Form 1120S). Since the market imploded in 2008, self-employed borrowers lost the ability for "stated income" loans. That means they already needed a tremendous amount of paperwork to document income for a mortgage.
Before COVID, the mortgage industry qualified self-employed borrowers on the most recent two years of personal and business tax returns. An updated profit and loss statement, (P&L) was required only after the first quarter of the next year. If the two years showed sufficient, stable, and/or increasing income, the loan moved forward. If it declined, there was still usually a solution.
Now in addition to the above, they need to prove that the business’ current income is stable, and the business is viable. That is where most businesses are challenged. Due to COVID, a lot of them experienced significant declines in their income from 2019 to 2020. In the first quarter of 2021, they are still struggling and not back to full capacity.
To combat these challenges, you need mortgage experts who are experienced working with self-employed borrowers. They look at each scenario to find a solution. The experts will analyze the documentation listed below to help determine your next steps and if there is anything you can change to make it better. They work with your accountants as needed.
At a minimum, these are the typical documents needed:
2019 and 2020 personal and business tax returns (businesses with 25% ownership or more)
2021 year-to-date P&L and balance sheet (thru the previous month)
3 most recent months of business bank statements (to match P&L)
Active Minnesota business license or similar document
This does not mean all hope is lost and self-employed borrowers cannot get mortgages. That is not the case; find a mortgage expert who understands these types of loans and who can guide you through the process. With that partnership in place, there is a lot that can be done to qualify now or in the near future.
When looking for a mortgage expert, ask them about their specific experience with business owners. Make sure you are in the best hands possible!
For more information call 952-913-7797, email oakgroup@kevnikmortgage.com or visit the website kevnikmortgage.com/oak-group.
*Kevnik Mortgage is an Equal Housing Lender located at 16180 Hastings Ave SE #301, Prior Lake, MN 55372.
