Self Employed and Denied a MHA HAMP Loan?

June 8, 2012

iStock_000015861187XSmall.jpgAs most of us know by now, while it may appear easy to apply for a loan modification under the Making Home Affordable (MHA) Home Affordable Modification Program (HAMP), it's not so easy to get approved for an MHA HAMP loan--especially if you are self-employed. From my experience, at the Law Office of Linda C. Garrett, California a HAMP mortgage, bankruptcy and family-law practice, I have spoken with many self-employed person who was denied a MHA HAMP loan modification. While tempting to blame the lender/servicer, many times, the problem lies also with the borrower for failing to submit proper documentation for his/her business. The documentation needed for self-employed individuals is not the same as the documentation needed for wage earners. Additional documents are required.

Documents Needed

Basic Application

Most folks know about the basic documents needed when submitting their MHA HAMP loan modification application:

• Hardship letter
• Completed and signed RMA/Dodd Frank or Form 710 for Freddie Mac loans
• Utility bill
• Verification of Income
• Verification of other income, such as rental income
• Copies of tax and insurance bills of account not escrowed
• Homeowner's Association Bill
• IRS Form 4506T (or IRS Form 4506T-EZ)

For Self-Employed Individuals

Calculating "gross income" when self-employed is a task unto itself. Before submitting income verification, a borrow must first understand what "gross income" means--in the context of the self-employed. It has a different meaning as compared to wage earners. For wage earners, gross income means the total income received before deductions are made from wages for taxes, FICA, etc. For the self-employed, the goal is to calculate "adjusted gross income"--the amount AFTER payment of business expenses. For example, let's say Joe Borrower makes his living providing singing lessons. While his total gross revenue may be $100,000, he then needs to deduct his business expenses, such as office rent, office phone and all other expenses relating to the maintenance and upkeep of his business. If his business expenses are $50,000, then Joe Borrower's "adjusted gross income" (AGI) is $50,000, not $100,000.

Calculating AGI is vitally important because if not properly calculated, the borrower could (and will in most cases) be denied a loan modification because he has represented that he has too much income. At the other extreme, some self-employed people calculate AGI by looking to their tax returns--which in many cases may show negative income, i.e., the business made no profit. While this may be a favorable outcome for purposes of taxation, it's a bad outcome for purposes of applying for MHA HAMP loan modification. In essence, the borrower has just handed the lender/loan servicer the basis for denying the MHA HAMP loan modification application - no income!

In addition to the documents in the basic application, the self-employed borrower needs to provide the following additional documents:

• Self-employment bank statements
• Signed Profit and Loss Statement covering at least a 3 month period. (The Profit and Loss Statement period should correspond the bank statements provided. For example, if the profit and loss statement covers the period from January 1, 2012 to March 31, 2012, then the self-employed borrower needs to provide his bank statements for the same period.
• K1 document--required for Limited Liability Corporations (LLC), Partnerships, or S Corporation.
• Rental income: current lease agreements, Schedule E, and Proof of rental receipts
• And any other documents necessary to explain and/or verify income.

Need Help?

If you or someone you know owns a California distressed property, I am able to provide and assess their situation to determine all their options, based on the current laws and programs (state and federal) that are available today--and, possibly, in the future. No doubt, navigating the world-wide web can be a confusing and arduous process; and, it is especially important that a California homeowner understand the various laws and programs as they relate to California homeowners. My experience and assistance extends to helping self-employed individuals throughout the entire state of California.

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