Mortgage Law: Self-Employed Clients and Income Verification
Perhaps the most well-known mortgage legislation of the last 40 years, and the one to have the greatest impact on consumers, is the Dodd-Frank Act of 2010. This was the primary law intended to guide the U.S. out of the recession, reforming both Wall Street and the mortgage industry. One of the most key critical aspects of the Dodd-Frank Act is the Ability-to-Repay Rule which effectively standardized underwriting requirements for certain types of mortgages. This rule requires, by law, verification of a client’s Ability-to-Repay a mortgage loan. Without this verification, a lender could face additional liability.
What makes this law so important for self-employed clients and business owners? In short, the income information given to the IRS in general should not be materially different than the income information given to a mortgage company. (If you count something as income for a mortgage, it must also be income on your taxes. If it’s not taxable income, it’s likely not usable for a mortgage.)
Therefore, for self-employed clients, it’s important to understand income qualification rules, document everything appropriately, and plan ahead. Every company must look at a one to two year history of tax returns when establishing income. Always look for a Loan Advisor who understands these requirements and has experience navigating tax documentation to ensure you find the best options you qualify for.