Obstacle: You’re self-employed and your most recent year of tax returns show significantly more or significantly less income compared to the previous year.
Why it’s an obstacle: When you borrow an amount that is considered a jumbo mortgage (north of $726,525 in NYC), the loan cannot be sold to the agencies (Fannie Mae or Freddie Mac) because the loan size is above their threshold. So, lenders put loans like these into their “portfolio.” The vast majority of portfolio guidelines will require a self-employed borrower to provide two years of tax returns. An underwriter that sees a significant variance in income from one year to the next, could classify the income as unstable and could even decline the loan.
Potential Solution: Borrow less than $726,525. During your pre-approval process and your application process, the lender will run your application through an automated underwriting system (AUS). The system for Fannie Mae is called Desktop Underwriter (DU) and the system for Freddie Mac is called Loan Prospector (LP). Both AUS will analyze all of the components of your application (credit profile, income, assets, reserves, etc.). The AUS will also list all of the documents that the lender would be required to collect from you in order for your mortgage to be eligible to be sold to the agency. In many instances, especially when you have good credit, are making a sizeable down payment and you have reserve assets, the AUS will only ask for a single year of tax returns. So, in that instance, the underwriter would only review 1 year of returns and would not be able to categorize the income as unstable.
Downside: Portfolio loan rates are better than agency rates. So, if you implement this plan, you might pay a slightly higher rate on your mortgage.
Any questions for me? Email me at matthew.jablonski@elliman.com or give me a call at 914.714.9102.
