Fannie Mae & Freddie Mac – Employment Switching From Self-Employed to W2

Question:

When a borrower is transitioning from self-employment to a W-2 wage earner job, do Fannie and Freddie have any rules requiring a minimum length of time at the new job?

Answer:

There is nothing specifically noted by the Agencies in regard to a waiting period when a borrower shifts from self-employment or 1099 earnings to W-2 earnings. It sounds like the borrower obviously has the typical 2-year employment history, albeit as self-employed…

BUT what triggers a potential waiting timeframe is how the borrower is paid.
As you know, a borrower who is paid variable or fluctuating income, like variable hours, OT, commission, etc., MUST have a minimum 12-month history, with positive factors, to establish a trending analysis for that income to be included in the Total Qualifying Income. On the other hand, a borrower on a fixed salary or fixed hourly income (hours that do not vary) may be able to proceed with no waiting period, assuming appropriate documentation is available, such as a paystub, VOE, fully executed employment contract, etc.

Circumstances to Consider and Evaluate:

• Is the new job related to the industry in which the borrower was self-employed?
• Does the income amount seem reasonable to the industry/profession/market/skill set?
• Will you have a paystub prior to the loan closing/Note Date? Or will you be utilizing Future Employment Guidelines? Remember, Fannie and Freddie have restrictions regarding Family Member employment, and extra documentation is needed when that is present, i.e., Tax Returns reflecting employment with the Family Member, no Future Employment, etc.
• Is the borrower planning to keep the self-employment company open and operate it as a Secondary Employment Source? Or is the borrower shuttering the business?
• Is the borrower technically working for the same company, and is the company switching the borrower from 1099-employment to W-2 employment? What letters of explanation might you need to document this change and confirm that it is not a temporary change solely for the benefit of obtaining mortgage financing?
• Are there any red flags that may create additional questions related to this change?
• What is/was the motivation for the change?

References:

Fannie Mae: B3-3.1-03 & B3-3.1-09 & B3-3.1-02

Freddie Mac: 5303.1

Subscribers can access the Income Analyzer – Expected Income – All Agency Comparison chart under our “Income Analyzers” page.