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#2101631 - 10/04/16 04:36 PM Income verification for recently self employed
Beth175 Offline
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Beth175
Joined: Feb 2009
Posts: 153
Wisconsin
We have an applicant who became self employed within the last year - we have tax returns but they don't really document the self employed income rather they show his prior income with an employer. Borrower does not pay himself regularly either so pay stubs don't document much income. Can we use a profit & loss statement to calculate/verify his income and base our decision on the prior years income and the fact that he is still in the same line of business? The profit & loss statement was not created or reviewed by a third party so how much can we rely on that information? Trying to look at all angles and make a loan to a qualified applicant who just can't provide 2 years documentation of self employed income. Any thoughts on what we can use?

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Ability to Repay/Qualified Mortgage Rule
#2101662 - 10/04/16 06:35 PM Re: Income verification for recently self employed Beth175
rlcarey Offline
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rlcarey
Joined: Jul 2001
Posts: 79,923
Galveston, TX
What type of self-employment? LLC, S-Corp, Sole Prop???
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#2101685 - 10/04/16 07:38 PM Re: Income verification for recently self employed rlcarey
Beth175 Offline
100 Club
Beth175
Joined: Feb 2009
Posts: 153
Wisconsin
Individual worked for a law firm in another state, has now moved to our state and has started his own practice. Not sure how it is structured but would guess LLC or Sole Proprietor.

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#2101712 - 10/04/16 08:59 PM Re: Income verification for recently self employed Beth175
rlcarey Offline
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rlcarey
Joined: Jul 2001
Posts: 79,923
Galveston, TX
Well it really depends on how the business is structured. If this is a disregarded entity for tax purposes, this statement doesn't make much sense: "Borrower does not pay himself regularly either so pay stubs don't document much income."

Profit and loss would probably be acceptable if he has his accountant prepare it.

" base our decision on the prior years income and the fact that he is still in the same line of business?"

That is also a misnomer. How can you equate past income as an employee of a law firm with a start up business?
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The opinions expressed here should not be construed to be those of my employer: PPDocs.com

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#2101835 - 10/05/16 03:33 PM Re: Income verification for recently self employed rlcarey
Beth175 Offline
100 Club
Beth175
Joined: Feb 2009
Posts: 153
Wisconsin
It is an LLC based on 2015 business tax return. He was self employed for a small portion of the year.

If applicant qualifies I don't want to tell the lender they must deny the loan because we don't have 3rd party verification of his income listed on the current profit & loss statement. The P&L statement does not appear to be prepared by a 3rd party so I am guessing we can't use it to determine his income and ability to repay.

Any thoughts on what we can use to verify his income and hopefully approve the loan?

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#2101840 - 10/05/16 03:48 PM Re: Income verification for recently self employed Beth175
rlcarey Offline
10K Club
rlcarey
Joined: Jul 2001
Posts: 79,923
Galveston, TX
If you are referring to a QM under Appendix Q, a self employed person has to have been at it for two years to qualify.

3. Minimum Length of Self Employment.

a. Income from self-employment is considered stable, and effective, if the consumer has been self-employed for two or more years.


If you don't fall under Appendix Q, then you can make your own rules. Just make sure that you apply whatever rules you make up across the board.
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The opinions expressed here should not be construed to be those of my employer: PPDocs.com

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#2101892 - 10/05/16 05:36 PM Re: Income verification for recently self employed rlcarey
Beth175 Offline
100 Club
Beth175
Joined: Feb 2009
Posts: 153
Wisconsin
This would be Ability to Repay not a QM so appendix Q wouldn't be followed but I thought ATR required us to consider and verify the income. With verify - requiring 3rd party documentation. I am stuck on what 3rd party documentation a new self employed borrower who formed an LLC would even be able to provide to support the income they are claiming. He is the sole owner of the business and has the ability to take owner draws and doesn't receive a regular pay check.

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