The self-employed, 14.6 million in all, represented 10% of the nation’s 146 million workers, and in turn provided jobs for 29.4 million other workers, according to a 2014 Pew Research Center analysis of data from the U.S. Census Bureau.
Analyzing the self-employed borrower (SEB) may require a little more effort and attention compared to your typical borrower, but when they represent 10% of your potential business you can’t afford to ignore them.
With the right tools and training, you can determine a self-employed borrower’s ability to repay a loan with nearly as much speed and accuracy as a typical borrower. From brewmasters and chocolatiers to dog walkers and toy makers, you won’t bat an eye when you learn they’re self-employed ― it’s simply another customer you’re eager to help with their mortgage.
The ABCs Of SEB
What makes someone a self-employed worker? Self-employed people work for profit or fees in their own business. They could be sole proprietors of their business or own it in partnership with others. Also, the businesses run by self-employed workers may assume any of several legal forms, including incorporation.
Why is it so complicated to determine whether they can and will repay a mortgage loan? Because obtaining an estimate of their earnings from tax returns can be much more confusing than a typical borrower. With a typical borrower, you can get a good snapshot of their income from a W-2 Form, a pay stub or Verification of Employment documents. However, with a self-employed borrower, there is no independent third party to verify employment and income. Without the employer providing the W-2 or Verification of Employment documents, the most credible sources to verify income are the tax returns that have been submitted to the IRS.
The primary challenge is that for self-employed borrowers, their accountants are experts at reducing tax liabilities by minimizing current net income. So, although the tax return reveals the borrower’s taxable income, it really doesn’t reveal their actual cash flow. And that’s what you need to find out ― because cash flow is what’s used to pay back the loan.
Tools & Training For Evaluating The Self-Employed Borrower
It’s almost impossible to determine the cash flow of a self-employed borrower without the right tools. That’s where we come in. MGIC offers two ways to help lenders and underwriters determine the cash flow of a self-employed borrower:
Click here to access online, editable cash flow worksheets in PDF form.
Line-by-line instructions guide you through the process and built-in calculators perform math functions
Each line item contains a link to more detail in the Self-Employed Borrower Resource Guide
Saves to your computer so you can come back to complete or edit at your convenience. Training through online, interactive webinars
Dedicated trainers respond to your questions in real time
Printable worksheets help you learn as you go
Multiple sessions a month to fit your schedule
Webinars are recorded to reference at your convenience
MGIC, the principal subsidiary of MGIC Investment Corporation, serves lenders throughout the United States, Puerto Rico, and other locations helping families achieve homeowner-ship sooner by making affordable low-down-payment mortgages a reality. At Feb. 28, 2017 MGIC had $182.9 billion of primary insurance in force covering approximately 1 million mortgages.