Underwriting question. Sold my business on January 1, why do I need to show last years business returns? (insurance, loan)

[PaJohn]

Quick question for those that know the underwriting process. I originally applied for mortgage end of last year while I owned my own business. I told them that I was selling it on Jan 1 and that I'd remain an employee for 3 years. I provided 2 years of personal and corporate tax returns (S corp). Since I would not own the business after Jan 1 they would not use the business income to qualify but nor would they use income from the loan. I qualified on salary and other income alone anyway.I also provided the sale agreement showing amounts I would receive as well as employment agreement for 3 years.

Getting close to settlement and now they want both personal and corp returns for 2014. They insist that they need the new corp returns since I was an owner in 2014. They say it's federal requirement. Is this true? Can someone point me to applicable federal regs. It just doesn't make an sense since they are NOT counting any of the income from the business or the sale.

Thanks

[Pfhtex]

It's more about liability than income.

You need to prove that you are no longer involved in the business as an owner in any capacity and that dissolution did not result in you walking away with debt connected to the company. I'm hoping your business did not entail a number of dba's and entities, such that each had their own accounts receivables, etc., or you are about to be put through the wringer. Thickest file I ever worked was for a great borrower who had dozens of oil well partnerships, and although he divested, we had to prove out full indemnity, with no resulting ancillary ongoing debt, from every single one. Phone book.

I do not want to seem glib and post a general FNMA guideline database. I will see if I can get the specific guideline(s) that apply to you in the AM.

[PaJohn]

Thanks. A few more facts:

They already have 2012 and 2013 corporate returns. Zero debt in Corp and no contingent liabilities other than the loan to me which they are not counting as income. They have the full, legal sale agreement showing I am no longer involved other than as a salaried consultant. It's a small insurance agency, nothing exotic.

I've read some of the Fannie Mae requirements and I believe it says that they don't have to check out the business if they are relying on just salary and other income.

If I applied today for a new mortgage, I would qualify on other salary and income. Would I even have to disclose that I previously owned a business? If I did, would they ask for corp returns?

Thanks. I really appreciate your help.

[SmartMoney]

A two year history of employment is required. Standard documentation for self-employed individuals are copies of personal and business return, including K1s. There's no, "but not if you sold or gave away the company."

If you were working at United Airlines and going on pension January 1, 2015, we would still document your most recent 2 yeara employment with W2s and tax returns.

[PaJohn]

Yes, I understand two year history. But business was an S corp and the bank is only counting the "salary" I received from the corp. No K1 profits and no income form the sale. Salary is continuing under new owner. If they are only looking at salary, why need corp info?

[SmartMoney]

Anytime a self employed individual files an 1120S with the IRS, the officer's salary will be on line 7. Traditional documentation for self employment history are the personal and business returns, supplemented with IRS transcripts demonstrating these are, indeed, the returns turned in. The lender orders the IRS transcripts.

The driving reason behind the requests is the fear of not supplying the standard of the industry documentation will make your loan unsalable. But the even bigger fear would be the loan be labeled as a nonQM mortgage, indicating the lender did not document your income. Non QM loans are the most feared loans to have on the books by most lenders. (The exception being portfolio lenders).

The real question is why, other than you don't think you should have to, don't you want to turn in the returns? The more you dig in your heels, more suspicion follows. As credit tightens, fraud increases. We are coming off of some of the tightest criteria I've seen since the 1980's. Turning in bogus returns was not rare, few would know how to dummy up an 1120 to match. If there is a valid reason to refuse, that needs to be shared with the lender so they can evaluate the risk of not packaging your loan correctly.