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The Challenges of Getting a Loan Modification When Self Employed

The Challenges of Getting a Loan Modification When Self Employed

The Challenges of Getting a Loan Modification When Self Employed 150 150 The Law Office of Nadia K. Kilburn

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Glossary of Terms

If you’re self-employed and applying for a loan modification, your lender will likely request that you verify your income by providing them a profit and loss statement for your business for the most recent 90-days.

To get approved for a modification, you are trying to show the bank that:

  • You are making enough money to comfortably afford resuming your regular monthly mortgage payment
  • You aren’t making so much money (or experiencing such a high surplus of income) that you can pay back all of the arrears at once

Getting a loan modification approved using self-employment income can be challenging because self-employment income can be inconsistent, fluctuating, and difficult to present accurately.

Your self-employment income doesn’t reflect how much money you actually have

If you are a seasonal business and you happen to be applying for a loan modification in the middle of your down season, it may look like you don’t make enough to support resuming mortgage payments.

Conversely, if you’re applying for your modification during your highest 3 months of the year, it may look like you make way too much money and the bank may try and take a high lump sum payment from you as part of your loan modification.

The Solution: Expand your profit and loss statement as much as you need to reflect an accurate average monthly income. 

As long as you are showing the bank the most recent 90-days, it is totally appropriate to show them MORE than the most recent 90-days so that they have a larger sample to pull from.

If three months of income shows your income to be inaccurately low or inaccurately high, correct the average by expanding the time period to include more months of income.

Negative profits make it look like you are not earning any money

Even if your profit and loss statement shows wages paid to yourself every month in a stable amount, bank representatives may get confused if the final number at the bottom of your profit and loss statement is negative.

If your business is not profitable, but you are paying yourself a standard wage each month, the bank representatives may scroll to the bottom of your profit and loss statement, see a negative sign and then just assume you’re not making money.

The Solution: Attach a letter of explanation to your profit and loss statement directing them to your “wages paid to self” line.

Include in the letter a reference to the income reported on your tax returns so they turn their attention to the documents that support your take-home pay.

The bank rejects your profit and loss statement

Banks are reluctant to tell you what kind of template for the profit and loss statement they’d like to see but they usually want to see the most simplistic, easy-to-read type of statement.

If you have a complicated business structure and your profit and loss statement contains tons of information in addition to just the income and expenses, you may want to consider scaling down and using a simpler template.

The Solution: Use this template to present your self-employment income. 

This format keeps your income clear, clean, and simple which will increase your chances of passing the bank’s review.

You don’t know that your job is considered “self-employment income”

If you own your own business, you are obviously self-employed but there are many other types of jobs people do these days that count as “self-employment” income.

Below are the most common examples of non-traditional income sources that count as self-employment income:

  • Door Dash Drivers
  • Uber Drivers
  • Facebook Marketplace Sellers
  • Etsy Sellers
  • Babysitting / Daycare
  • Yoga Instruction / Fitness Instruction

If you have one of these types of jobs, you should be providing a profit and loss statement so that your income gets included in your loan modification review.

Basically, any job where you’re receiving either a direct deposit or cash after you perform a task or sell an item CAN be counted in a loan modification review – you just have to present the income correctly.

The Solution: Use the 3 tips below to present your non traditional income correctly.

  1. Write $0.00 on the “total expense line” if you don’t have any expenses. Banks don’t like all the expense lines to be left blank, so if you have a job where you truly don’t have many expenses that come to mind, make sure you write $0.00 on the “total expenses” line instead of leaving it blank. The lender wants to know that you definitely do not have any expenses, not that you just forgot to write them in.
  2. If you’re doing jobs for cash, deposit the cash into your bank account each month and make sure that the amount you’re depositing matches what you’re reporting on your profit / loss statement. Banks need to see that the cash you’re reporting on your application is the same amount you are actually receiving. Deposit all cash received into your bank account so the bank can verify the income.
  3. Don’t be afraid to report an AVERAGE of your earnings to give yourself the best shot at success by showing your highest possible income. If you are a seller on Facebook Marketplace and you sell 5 things one month and 0 things the next month and 4 things in the third month – you will be giving the bank a profit and loss statement showing 9 things in total sold for the last 90-days.

On your loan modification application, report your income in the most accurate way possible by writing your monthly income as an average of the items sold for the last 90-days.

Using the example above, take the total received from the sale of the 9 items, divide the total by 3 (months) and this becomes your “average monthly self-employment income.”

If you have questions about presenting your self-employment income when applying for a loan modification, feel free to give me a call at (425) 654-1674.

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