Self-Employed Income Documentation
When using Loan Prospector and documenting self-employed borrowers, keep the following information in mind:
- The documentation required for a self-employed borrower varies based on the documentation level returned on Loan Prospector's Full Feedback Certificate
- If the borrower owns 25% or more of a business, you must indicate that the borrower is self-employed in the data submitted to Loan Prospector
- The Internal Revenue Service (IRS) data base income for individuals (verified by the IRS through Form 4506 or 8821 or an alternate form acceptable to the IRS that collects comparable information) will be considered an acceptable form of documentation in lieu of tax returns, provided all line items from the tax returns that precede the taxpayer's signature are obtained
- When business assets are to be used for downpayment and closing costs, verification of such accounts is required
The following requirements apply to Loan Prospector® mortgages that receive an Accept Plus documentation level:
If more than 25% of the borrower's income is from self-employment, Stated Income may be used regardless of the length of time the borrower has been self-employed. The following documentation must be obtained to evidence employment even if self-employment is not the borrower's primary source of income:
- Signed pages one and two of the individual borrower's most recent (one year) federal income tax return, and
- Signed IRS form 4506 or 8821 (or alternate form acceptable to the IRS that authorizes the release of comparable information) for the most recent year
If less than 25% of the borrower's income is from self-employment, Stated Income may be used regardless of the length of time the borrower has been self-employed, but you need only document the primary source of income. You must still indicate that the borrower is self-employed in data submitted to Loan Prospector.
The following requirements apply to Loan Prospector mortgages that receive a Streamlined Accept documentation level:
To document self-employed income, obtain the individual borrower's complete most recent (one year) federal income tax return and obtain a signed IRS Form 4506 or 8821 (or alternate form acceptable to the IRS that authorizes the release of comparable information) for the most recent tax year.
The self-employed documentation is required even if the income is not being used to qualify the borrower. You must use the documentation to determine what effect the business income or loss has on other types of income.
The following requirements apply to Loan Prospector mortgages that receive a Standard documentation level and all non-Loan Prospector mortgages:
- Obtain the individual borrower's two most recent complete federal income tax returns, and obtain a signed IRS Form 4506 or 8821 (or alternate form acceptable to the IRS that authorizes the release of comparable information) for the most recent two tax years, and
- Obtain two years complete business tax returns for each business providing income to the borrower for qualification
Or
- Document that the individual tax returns show self-employed income increased over the past two years, borrower funds are not coming from the business account and the borrower has been self-employed in the same business for at least five years. If all of these apply, you do not need to obtain business tax returns.
This documentation is required even if the income is not being used in qualifying the borrower. You must use the documentation to determine what effect the business income or loss has on other types of income.