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Tips For Success With Self-Employed Borrowers

Know a business’ viability with a thorough financial review for success

Mary Kay Scully headshot
Mary Kay Scully
Success With Self-Employed Borrowers

According to the St Louis Fed, the number of self-employed people increased during the pandemic. As of February 2022, self-employed workers made up almost 11% of the 157 million employed in the U.S. labor force. Now, with a growing number of people being self-employed, it’s imperative that you know how to work with them. If you haven’t already encountered a self-employed borrower, chances are that you will at some point.

Why is it important?

The reality is that businesses fail. Based on an analysis of the Bureau of Labor Statistics data, LendingTree says that 1 in 5 businesses will fail within the first year. And in the challenging economy we’re faced with right now, some businesses won’t be profitable — or at least not profitable enough to support someone’s investment in a home.

As much as we want to get people into homes, we also want to make sure they stay in them. It is your responsibility as their lender to ensure their income can support their purchase and they are able to afford the loan amount and be capable of making timely payments.

It’s imperative that when the borrower’s income is coming from a self-employed source, their business is considered viable, and that’s why it’s so critical that all relevant documents are reviewed. Ensuring you get all the information you need to determine the viability helps you make accurate calculations and get comfortable with the adjustments to the reported income.

Making accurate calculations also reduces delays and other errors down the road. We talked about this last month — it’s always better to do things right up front, even if it involves some extra work.

Speaking of work — show your work! Use one of the many industry worksheets available from Fannie Mae, Freddie Mac, your loan origination software (LOS) vendor or mortgage insurance partner Having it all laid out helps you not only understand the math but also more easily catch any errors you might have made

What do you need?

So, to make the right calculations, what information do you need? It’s essential to get their full set of tax returns with all the schedules and worksheets so that you have everything you need to do the math and find out exactly what your borrowers can afford. Depending on the business type and their role within it, the forms you need will vary.

Here are the different business structures and how they typically report taxes:

• Sole Proprietor or Independent Contractor
- IRS Form 1040
- Schedule C

• Farm
- IRS Form 1040
- Schedule F

• Partnership
- IRS Form 1065
- Form K-1 for profit and loss
- IRS Form 1040 may reflect pass-through incomes on B, C, D, E or F

• S-Corp
- IRS Form 1120S
- Form K-1 for profit/loss
- IRS Form 1040 may reflect pass-through incomes on B, C, D, E or F

- May complete partnership or S-Corp tax returns
- Single member or spouse may complete Form 1040 or Schedule C

What’s in it for you?

We’ve established that knowing how to work with self-employed borrowers is essential for making the right calculations and assessing their incomes, but it also plays a critical role in the customer experience.

Since self-employed borrowers are so unique, having a reputation for working well with them can do great things for your business. If your referral partners know you excel at working with self-employed borrowers, they’ll be more likely to send them your way because they know you’ll provide the best experience with the best results.

Plus, the self-employed community is a small one — people talk. And if they are talking about you for the right reasons, that bodes well for future business.

The bottom line is that you can’t handle self-employed borrowers the same as everyone else. Knowing exactly what you need and why you need it will help ensure you do your job accurately, and it will provide a better customer experience for your borrower as well.

This article was originally published in the NMP Magazine March 2023 issue.
Mary Kay Scully headshot
Mary Kay Scully

Mary Kay Scully is the Director of Customer Education at Enact, leading the development of the company’s customer education curriculum. The statements in this article are solely her opinions and do not necessarily reflect the views of Enact or its management. 

Published on
Mar 06, 2023
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