Mortgage Denied due to PPP loan

[Nicholas Romero]

I received a precautionary PPP loan for my small business and it seems like it's causing me issues when trying to complete a cash-out refinance on one of my homes. It happened about as last minute as possible - I had signed all closing docs with a notary and was just waiting for the loan to fund. The lender's rationale for canceling was due to Fannie/Freddie guidance on loans where self employed borrowers apply for any Covid relief assistance for their businesses. Apparently receiving assistance is considered a request for financial help and will disqualify you for a mortgage. I tried digging to find where exactly something like this was issued, but the below was all I found. Has anyone else run into issues with this?

https://selling-guide.fanniemae.com/Content-Management-Labels/Guide-FM-com/1799667111/COVID-19-FAQs-Underwriting-General-05-05-2020.htm

1. Does the lender need to consider a Paycheck Protection Program (PPP) loan when analyzing a self-employed borrower? NEW

The PPP is a loan issued by Small Business Administration lenders under the CARES Act. These loans are designed to provide a direct incentive for small businesses to keep their workers on the payroll. The existence of a PPP loan could be helpful information in analyzing the borrower's business. Lenders should apply due diligence and review the actions of the business and any impact the current situation has taken on the flow of income.

1. Does the lender need to consider a Paycheck Protection Program (PPP) loan in the borrower’s DTI? NEW

Under the CARES Act, PPP loan terms allow deferred payments for a specified period, no personal loan guarantee, and the potential for all or some portion of the loan to be forgiven. Therefore, no payments would be expected to be included in the borrower’s liabilities at this time. Once it has been determined that any portion of the PPP loan must be repaid, follow the Selling Guide requirements for loans paid by a business.

[Russell Brazil]

You are borrowing money.  The person loaning you that money is loaning it based on your credit worthiness.  If you are borrowing additional funds in an emergency situation to help your business survive, then your credit worthiness may in fact be in question.

I think a lot of people taking PPP loans, unemployment and mortgage forbearance during this, are in for a surprise of the unintended consequences of doing so.