Here are the FHA guidelines for self-employed borrowers:

Who is considered self-employed?

A borrower with a 25% or greater ownership interest in a business is considered self employed for FHA loan underwriting purposes. This includes anyone who receives a 1099 form even if you  report to a particular place of employment every day.  Many independent contractors mistakenly don’t consider themselves self-employed.

How long does a borrower have to be self-employed to count as effective income?

Most new businesses fail within the first two years and a huge percentage of the one’s that survive the first two years fail within the next two years. FHA tends to be lenient so income from self employment is considered stable and effective, if the borrower has been self employed for two or more years.

When a borrower has been self employed between 1 year and 2 years, in order to be eligible for a mortgage loan, the borrower must have at least two years of documented previous successful employment in the line of work in which he/she is self employed, or in a related occupation. Keep in mind that this is still up to the judgment of the underwriter.  After all, doing the work  for someone else’s business is not the same as running the entire business.

A combination of one year of employment and formal education or training in the line of work in which the individual is self employed or in a related occupation is also acceptable.  Again, the underwriter has discretion in this area.

In addition, in both cases individual lenders may adhere to stricter guidelines in both cases.

Less than one year of self employment is not ever considered effective income.

What is required to verify self-employed income?

For income verification, self-employed borrowers must provide:

• signed, dated individual tax returns, with all applicable tax schedules for the most recent two years
• for a corporation, “S” corporation, or partnership, signed copies of Federal business income tax returns for the last two years, with all applicable tax schedules
• a year-to-date profit and loss (P&L) statement and balance sheet, and
• a business credit report for corporations and “S” corporations.

TOTAL Scorecard Accept/Approve Recommendation (Automated Approvals)

If the Technology Open To Approved Lenders (TOTAL) Scorecard returns an Accept/Approve recommendation, the borrower is not required to provide business tax returns if all of the following conditions are met:

• individual Federal income tax returns show increasing self employed income over the past two years
• funds to close are not coming from business accounts, and
• the proposed FHA-insured mortgage is not a cash out refinance.

Note: A business credit report for a corporation or “S” corporation is not required if the loan receives a TOTAL Scorecard Accept/Approve recommendation.

VERY IMPORTANT: When qualifying a self employed borrower for a mortgage loan, the lender must establish the borrower’s earnings trend from the previous two years using the borrower’s tax returns.

If a borrower:

• provides quarterly tax returns, the income analysis may include income through the period covered by the tax filings, or
• is not subject to quarterly tax returns, or does not file them, then the income shown on the P&L statement may be included in the analysis, provided the income stream based on the P&L is consistent with the previous years’ earnings.

If the P&L statements submitted for the current year show an income stream considerably greater than what is supported by the previous year’s tax returns, the lender must base the income analysis solely on the income verified through the tax returns.

If the borrower’s earnings trend for the previous two years is downward and the most recent tax return or P&L is less than the prior year’s tax return, the borrower’s most recent year’s tax return or P&L must be used to calculate his/her income.

For the self employed borrower, the TOTAL Scorecard Accept/Approve recommendation does not require a P&L and balance sheet be provided, unless the income used to qualify the borrower exceeds that of the two-year average, based on tax returns. In such a case, either an audited P&L statement, or signed quarterly tax return is used to support the greater income stream.

The TOTAL Scorecard Refer recommendation requires a P&L and balance sheet, or income information directly from the IRS if both of the following conditions exist:

• more than seven months have elapsed since the business tax year’s ending date, and
• income to the self-employed borrower from each individual business is greater than 5% of his/her stable monthly income.

Analyzing the Business’s Financial Strength: To determine if the borrower’s business is expected to generate sufficient income for his/her needs, the lender must carefully analyze the business’s financial strength, including the

• source of the business’s income
• general economic outlook for similar businesses in the area.

Annual earnings that are stable or increasing are acceptable, while businesses that show a significant decline in income over the analysis period are not acceptable, even if the current income and debt ratios meet FHA guidelines.

In the next installment we will cover the guidelines the underwriter must follow in analyzing the borrower’s income.

The changes to FHA’s Special Forbearance Program announced today will require servicers to extend the forbearance period for FHA borrowers who qualify for the program from four months to 12 months and remove upfront hurdles to make it easier for unemployed borrowers to qualify.

“The current unemployment forbearance programs have mandatory periods that are inadequate for the majority of unemployed borrowers,” U.S. Housing and Urban Development Secretary Shaun Donovan said. “Today, 60 percent of the unemployed have been out of work for more than three months and 45 percent have been out of work for more than six. Providing the option for a year of forbearance will give struggling homeowners a substantially greater chance of finding employment before they lose their home.”

Changes to MHA’s Home Affordable Unemployment Program (UP) will require participating servicers to extend the minimum forbearance period from 3 months to 12 months for eligible unemployed homeowners, whenever possible subject to investor and regulator guidance for each mortgage loan. Additionally, forbearance under UP will become available to borrowers who are seriously delinquent.

All FHA-approved servicers must participate in FHA’s Loss Mitigation Program, which includes the Special Forbearance program. In addition to extending the forbearance period and removing the up-front hurdles for borrowers, the FHA also reemphasized its requirement that servicers conduct a review at the end of the forbearance period to evaluate the borrower for all additional, applicable foreclosure assistance programs and notify the borrower in writing whether or not he/she qualifies for any other available option. If the borrower does not qualify for any foreclosure assistance option, the servicer must provide the borrower with the reason for denial and allow the borrower at least seven calendar days to submit additional information that may impact the servicer’s evaluation.

These reforms build on successful Administration initiatives to support unemployed borrowers through the $7.6 billion Hardest Hit Fund and the $1 billion Emergency Homeowner Loan Program (EHLP). The Hardest Hit Fund, first announced in February 2010, provides support to 18 states and the District of Columbia, which represent the areas hardest hit by steep home price declines and unemployment, to design and implement programs to help struggling homeowners avoid foreclosure. Participating states have dedicated approximately seventy percent of program funds toward programs to help homeowners struggling with unemployment or underemployment. As of this month, each participating state is accepting applications from borrowers and providing direct mortgage assistance to those that qualify.

The EHLP program complements the Hardest Hit Fund, by serving the remaining 32 states and Puerto Rico. Congress provided $1 billion dollars to HUD, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, to implement the recently launched program. EHLP assists homeowners who have experienced a reduction in income and are at risk of foreclosure due to involuntary unemployment, underemployment due to economic conditions or a medical condition. EHLP is expected to aid up to 30,000 distressed borrowers, with an average loan of approximately $35,000.

You can find full details in HUD’s New Unemployment Fact Sheet.

You just have to know where to look.

Numbers released today, for example, show how the loan guaranty program run by the Department of Veterans Affairs is outperforming virtually every other loan or loan guaranty program in the country – even big-name, prime loan programs with strict credit requirements.

A VA loan is available to any veteran or eligible family member and offers the chance to purchase a home with no money down. This is contrast to the FHA loan program, which has a down payment of 3.5%, and conventional programs, which now almost-universally require 20% down.

One would think that a program that doesn’t require a down payment and is less strict than most programs out there today would be awash in foreclosures, but the 90-day delinquency rate is just 2.2% – compared to 4.5% for FHA. Part of the success stems from the close involvement in each loan from the agency itself, which considers itself as the ultimate advocate for its constituency: veterans.

That kind of notion – advocacy and representation in housing – is being attempted in at least two major cities. This week, the mayors of Chicago and Los Angeles – Rahm Emanuel and Anthony Villaraigosa – have announced developments in their cities’ efforts to purchase foreclosures in hard-hit neighborhoods, rehabilitate them, and sell them on the market.

Villaraigosa’s program in particular has already been underway and is steadily working to restore a few foreclosure-heavy neighborhoods in South Los Angeles. Emanuel’s program has not yet begun, but will aim to do virtually the same thing in Chicago.

Stabilization is the name of the game, both at the federal level and at the city level. More active intervention in the foreclosure market is required, as well as more of a relationship between the homeowner and the government – especially if the government is taking an active role in either guaranteeing the loan or developing the property.

Green Real Estate Shoots: What is Actually Working in the Foreclosure Market is a post from: Foreclosure Magazine – Read more about how does foreclosure work.

Today, the bank is making more news in the real estate world, involving both foreclosures and an ambitious real estate transaction that could see the corporation remove itself further from the real estate markets.

We all know that Bank of America is one of the main banks being targeted in a year-long probe by the federal government into the foreclosure quagmire that is the robo-signing scandal. The settlement is still pending; it could ultimately cost the five banks over $20 billion. The uncertainty also continues to wreak havoc with BoA’s stock price, which is why leadership in the bank want a settlement to be reached sooner rather than later.

The bank got a reprieve from New Jersey yesterday, freeing up the corporation to resume foreclosures in that state. BoA is also pushing for a resolution with not just the federal government, but also many of the 50 state attorneys general that have sought legal action against the bank as a result of the foreclosure scandal.

A previous deal worth $8.5 billion has yet to be approved by New York courts. Most of the exposure in this settlement and other cases stems from the beleaguered Countrywide Financial Corp and several toxic assets that this company – now a subsidiary of Bank of America – had on its ledgers.

To free up some cash to deal with this problem, Bank of America is contemplating selling approximately $1 billion worth of real estate to the Blackstone Group. Much of the property that would be sold includes commercial property, but a fair amount are residential properties from all over the world. This comes a week after the bank unloaded a credit card business from Canada for $8.6 billion – signs that the bank is trying to shore up its stock value by selling assets (and also to pay for the impending settlement).

It’s hard to read about some rotten part of real estate without coming across Bank of America’s name. The bank has had a deep presence in virtually every aspect of real estate in this country, and was rocked as hard as any other bank in the foreclosure crisis and collapse of the housing market. It is very possible that this spells the end of BoA’s involvement in real estate altogether; while it may continue to make mortgage loans, it has already sold $500 million worth of mortgages to Fannie Mae and can’t be eager to leap back into the business.

Will other large banks follow suit? Perhaps – and in the short term, at least, it may mean that local banks and credit unions will be the go-to sources for home loans for investors and homebuyers alike. That approach actually makes sense because these units are less likely to engage in robo-signing and other disputed practices like the big boys who, in many cases, had too many assets going bad all at once.

Bank of America Making Real Estate News Today is a post from: Foreclosure Magazine – Read more about how does foreclosure work.

Iowa Foreclosures Set to Increase in Near Future

For investors, homebuyers, and homeowners in Iowa, the future will probably mean more foreclosures.

In the Hawkeye State, analysts are expecting more foreclosures to enter the market over the next 12 months. This impending flood is described by some as a “dam that’s ready to break”, which is not an unfamiliar concept in the market today. Experts at the Iowa Legal Aid Foreclosure Defense Fund report the number of foreclosure assistance cases they handle is up significantly for August so far, and the rest of the year appears to be on the same trend.

While Iowa certainly isn’t near the top in terms of states that have been badly hit by the foreclosure crisis, its Attorney General, Tom Miller, is one of the key players in the foreclosure reform effort and lawsuit pending against Bank of America, Wells Fargo, JPMorgan, and other large lenders.

Fannie Mae Sued by Angry Michigan Officials

Nearby, in Michigan, state officials are incensed at reports that Fannie Mae has been encouraging foreclosures instead of loan modifications – at odds with the Obama administration’s purported emphasis on helping people stay in their homes.

Some in the industry in that state are not surprised, but others are railing against an agency that was doing something apparently at odds with its stated goals of pushing loan modifications as alternatives to foreclosure.

Michigan has been rocked by virtually every major economic crisis of the past 30 years – from the collapse of the domestic auto industry to the subprime mortgage crisis and now foreclosure. Detroit in particular is awash with acres of abandoned homes selling, in many cases, for pennies on the dollar.

It will be interesting to see what occurs between Fannie Mae and Michigan – and whether or not this issue will spread to other states who may have similar grievances. In any case, foreclosures will continue to enter the market, and investment opportunities will continue to proliferate in virtually every state, from the hard-hit (Michigan) to the relatively untouched (Iowa).

Foreclosure Snapshot: More Foreclosures Coming; Fannie Mae in Hot Water is a post from: Foreclosure Magazine – Read more about how does foreclosure work.