Self-Employed Clients

Tracy Flanagan
Senior Mortgage Consultant, Blueleaf Lending, a subsidiary of Midwest Bank
Tracy’s accounting background and many years of mortgage consulting inform her unique approach to clients with special income situations.

How can agents help clients who are self-employed or have unique income situations?
After the biggest financial crisis since the Great Depression, consumers may feel the loan process is arduous and invasive – especially if you have a unique situation, like a self-employed buyer or someone with an unusual source of income. Probably most important is for an agent to become familiar with a qualified loan officer they feel comfortable working with, who has experience with atypical conditions. As someone who specializes in these kinds of transactions, I have worked on loans for self-employed buyers for years, and their needs are different from a typical buyer, because the documentation required is going more specific and may undergo extra scrutiny. I had a buyer who was initially rejected by several lenders and then was referred to me. Upon review of the tax returns and a discussion with the tax preparer, it was determined there was more than one way to classify a deduction, and while typically this deduction is counted twice, it only needed to be counted once. I was able to close the buyer at the price point they wanted to buy.

At a minimum, a qualified lender should provide a checklist specific to that unique buyer’s needs, and then have a detailed, preliminary review to see what additional documentation would be needed for further support. My background is accountancy, so I am well versed in complicated tax returns and can help maneuver through them before submitting, so that we can make sure everything requested has been provided. Buyers who have the hardest time are usually those who do not provide the precise documentation requested. Substituting or omitting information is one of the biggest reasons a buyer’s file can be held up. Advise your client to work with and obtain exactly what the lender is asking for.

What issues should agents watch out for?
With difficult transactions, I do a lot of research upfront to make sure a loan will close. If a situation is unique, I do not assume it can or cannot get done – I try to get the answer in writing prior to submitting a file. If I cannot get the answer prior to submitting, I provide detailed and meticulous information supporting why it should be approved. A complete and logical file is a must with complicated buyers.

I see a lot of buyers needing to understand how much they can “qualify” for. That can often be different from what a buyer thinks they can afford. It’s critical that their income after taxes and other subtractions is analyzed to make sure the sale is within their means, as defined by the guidelines of the lender. This is especially critical for the self-employed borrower, as income is not as easily calculated. Tax returns, which demonstrate income, can be complicated, so often I ask the buyer to allow me to communicate with their tax preparer or CPA to get the proper information. Tax returns may have several K-1’s, which show the percentage of ownership a person has in a partnership, corporation, estate or trust, and the buyer may not even be aware they have any. Tax returns are not black and white, so if there is a unique line item, I will ask the tax preparer for clarification.

Another example of a common point of aggravation can be the lender asking for much more documentation during the process than at the beginning. Buyers should know the process requires a lot of clear and complete documentation from the start, and throughout the process until the end. A buyer’s file touches several people: the loan officer, the assistant, the processor, the underwriter, the closing department and so on. An underwriter’s job is to make sure the buyer is a qualified one, and this must be done without ever talking to the buyer, only by viewing what is in front of the underwriter on paper as submitted by the loan officer. They may see something the loan officer has overlooked and need documentation to support why this buyer is qualified, which means more preparation by the buyer. It’s definitely a process.

Worst-case scenario: If the client is missing key documents or records, how should agents proceed?
An agent should refer the client to a lender for further discussion. A good lender will stress the importance and urgency of obtaining all items upfront and discuss the lending process prior to looking at homes to make sure they are properly qualified. When I run across a buyer who is not properly prepared, I stress how many more things can go wrong without the proper documents. You would not go to the doctor and expect a proper diagnosis if you do not share your symptoms and history, would you? Transactions where expectations are discussed and accurate information is provided as needed to the lender are usually the happiest for both the agent and lender!