Upcoming rules for self-employment income calculations for Freddie Mac home loans:
For self-employed individuals, navigating the mortgage process can often feel like a maze of documentation and uncertainty. Freddie Mac is rolling out new rules starting November 8, 2024, that will significantly impact how self-employed income is calculated for borrowers. Whether you’re a long-time entrepreneur or just starting your business journey, these changes are important to understand.
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What’s Changing?
Freddie Mac’s new guidelines provide clarity for self-employed borrowers, particularly for those who have been in business for less than 24 months.
This change impacts how your qualifying income is calculated and could influence your borrowing power.
Current Rules:
Under the previous guidelines, Freddie Mac didn’t offer specific instructions on how to calculate income for those with less than 24 months of self-employment. This often left lenders and borrowers uncertain about how to proceed, resulting in potential delays and frustration.
What’s New Starting November 8, 2024:
The new rules are designed to make the process more straightforward and borrower-friendly. If you’ve been self-employed for less than 24 months, your qualifying income will now be calculated as the lesser of two figures:
Your monthly income from the self-employed business, or
Your monthly income earned with your previous employer.
This change introduces a clear method for determining income, helping self-employed borrowers better plan and prepare for their home loan applications.
Why Is This Important?
For those who have recently transitioned to self-employment, these new rules mean that you can’t rely solely on your current business income if it’s higher than your past employment earnings.
This can be particularly impactful if your new business is booming but hasn’t yet reached two years of financial history.
By basing qualifying income on the lesser amount, Freddie Mac is ensuring that lenders can assess your ability to repay based on a more conservative and reliable income figure, which might have been established through your prior employment. While this may feel limiting to some, it also provides reassurance to lenders and could help streamline the approval process.
What About Business Structure Changes?
Alongside the new guidelines for income calculation, Freddie Mac has also introduced updates regarding business structure changes.
If you’ve recently restructured your business or changed your business entity type (such as switching from a sole proprietorship to an LLC), make sure you understand how this might impact your mortgage application.
These changes can affect how income is verified and what documentation you’ll need to provide.
One of the key updates is that if a borrower changes their business structure (e.g., from a sole proprietorship to an S-corporation:
The borrower’s ownership percentage must remain the same for the previous and current business structures to be considered as the same business.
This means that if the borrower owns 100% of the business before and after the structure change, it will be treated as the same entity for mortgage purposes.
Additionally, lenders must ensure that there are no other significant changes to the business:
Such as changes in services, products, or location, that could negatively impact the borrower’s income.
If such changes occur, the business may be treated as a new entity, which can complicate income verification.
What Can You Do to Prepare?
If you’re self-employed and planning to apply for a home loan after November 8, here’s what you should do to ensure a smooth process:
Gather Your Documentation: Ensure you have accurate records of both your current self-employment income and your income from your previous employer. Lenders will need both to calculate your qualifying income under the new rules.
Consult a Mortgage Expert: Working with a knowledgeable mortgage professional can help you navigate these changes and prepare your application for success. I can also help you understand how these new rules may affect your specific situation.
Consider Timing: If your self-employment income is significantly higher than your previous employment income, you may want to discuss your options with a lender. Depending on your financial picture, it could be worth waiting until you have a longer self-employment history.
A Step Toward Clarity
Freddie Mac’s updates are designed to offer more clarity and predictability for self-employed borrowers. While the qualifying income formula may seem conservative, it’s intended to protect both borrowers and lenders, ensuring that loans are based on stable, verifiable income sources.
Understand and Prepare Self-Employment Changes
These new guidelines reflect Freddie Mac’s efforts to bring more structure and security to the home loan process for self-employed borrowers.
By understanding these changes and preparing accordingly, you can set yourself up for success when applying for a mortgage.
If you’re self-employed and have questions about how these changes will affect your home loan, don’t hesitate to reach out! I’m here to guide you through the process and ensure you make the best financial decisions for your future.
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