Where do self-employed borrowers earn their money? From the business they own. It’s that flow of money that not only determines their income, but is also in almost all cases their source for the money they have in the bank. How and when they money flows from the business to you personally will make all the difference in your transaction.
As the owner of the business, you have every right to operate that business they way you want. That includes pulling money out of that business and putting it into your pocket. But in mortgage lending, there’s a right way and a wrong way to do it. The consequences of going about it in the wrong way could result in greater documentation, added costs, or the ultimate decision from the lender that you cannot use those funds at all.
When an underwriter is presented a loan file where assets from the business are being used in the transaction, the underwriter has an additional duty to review the withdrawal of those funds and determine if there will be an impact to the viability of the business. It only seems logical that if the borrower is the transaction (the owner of the business) where to drain the business of too much cash, it could jeopardize the business’ viability or ability to continue in a manner the whole loan application was based upon.
Underwriters use a complex formula of cash flow analysis to determine if the monies being pulled from the business will impact its operation. Some lenders also require a letter from your company’s accountant or outside tax preparer that the use of those funds would not jeopardize the continued operation of the business. In any case, the lender will require two months of business bank statements to review. And if you have read my articles before, you will know that the government now requires lenders to review bank accounts for suspicious activity (large deposits). So just like your personal bank statements, if there’s something they are going to question, it will require you to provide additional documentation
There’s an easy solution to avoid all this hassle: Move your funds early. In lending, we always talk about the need for the borrower to provide the most recent 60 days of bank account history. That 60-day rule is very important to be mindful of. In the eyes of lending, anything in your accounts prior to those 60 days is never questioned – it is your money, regardless of the source. So with a little bit of planning, you can avoid all the hassles listed above! That 60-day rule on assets also applies to other sources of funds you may have received. If you obtain funds from the sale of a car or other personal items, receive gift funds from family, or are even repaid money you lent to family or friend, so long as those funds are in your accounts prior to bank statements you provide us, no further documentation is required.
So be smart. With just a little bit of planning, your use of business funds, or other sources of funds can be utilized without question.