Self-employed borrowers often have significant funds available within their businesses, making it tempting to use those assets toward a down payment, closing costs, or reserve requirements when purchasing or refinancing a home in Michigan. While both Fannie Mae and Freddie Mac allow the use of business funds in certain situations, there are important guidelines that must be followed.
Understanding the Solvency Requirement
When a self-employed borrower wants to use funds from a business account for a mortgage transaction, we must determine that withdrawing those funds will not create financial hardship for the business. This is commonly referred to as the business solvency test. Both Fannie Mae and Freddie Mac have similar requirements regarding the utilization of business assets. The key objective is to ensure that the business remains financially stable after the funds are removed.
The 1:1 Solvency Ratio
A commonly accepted benchmark is a 1:1 solvency ratio. To determine this, we compare the funds used for the mortgage transaction with the business’s average monthly deposits. In many cases, the calculation is based on:
Business Funds Used ÷ Two-Month Average Business Deposits
If the resulting ratio indicates the business can continue operating without financial strain, the funds may be considered acceptable for use in the mortgage transaction.
CPA Letters Alone Are Not Enough
Many Michigan business owners assume that a letter from their CPA or accountant confirming the business is financially healthy will satisfy mortgage requirements.
Unfortunately, that is generally not sufficient. While a CPA letter may provide supporting documentation, Fannie Mae and Freddie Mac guidelines require us to independently analyze the business’s financials and determine whether withdrawing funds could negatively impact business operations. Simply stating that the business is solvent does not relieve the lender of its obligation to conduct its own review.
Mortgage Solutions for Michigan Self-Employed Borrowers
We work with self-employed borrowers every day, including business owners, independent contractors, real estate investors, consultants, medical professionals, and entrepreneurs throughout Michigan. If you’re using business assets for a down payment or exploring alternative documentation programs such as bank statement loans,P&L loans, DSCR loans, or other non-QM mortgage options, our team understands the unique challenges self-employed borrowers face. If you’re planning to use business funds to purchase a home in Michigan, it’s important to review your documentation early in the process to avoid surprises during underwriting. Our mortgage specialists can help you evaluate your options and identify the best financing solution for your situation.
