September 20, 2018
What does it take for a self-employed borrower to be approved for an FHA mortgage loan? The same basic rules apply, FHA mortgage loans require a minimum 500 or higher FICO score to be eligible (lender standards will be higher) and FICO scores of 580 or higher for maximum financing and the lowest down payment.
But self-employed borrowers do have some additional issues to think about when coming to the FHA home loan process. How long you have been self-employed in an important factor, how the business has fared since you started it, and what the future of your income might be.
FHA Loan Rules For Self-Employment Income Verification
The rules that instruct the participating FHA lender are found in HUD 4000.1, and those rules include a requirement for the lender to verify a minimum of two years’ worth of self-employed earnings. The “two year rule” may have an exception provided certain requirements are met.
From HUD 4000.1:
“The Mortgagee may consider Self-Employment Income if the Borrower has been self-employed for at least two years. If the Borrower has been self-employed between one and two years, the Mortgagee may only consider the income as Effective Income if the Borrower was previously employed in the same line of work in which the Borrower is self- employed or in a related occupation for at least two years.”
This rule is also informed by the next paragraph in the section, found on page 204 of HUD 4000.1:
“Income obtained from businesses with annual earnings that are stable or increasing is acceptable. If the income from businesses shows a greater than 20 percent decline in Effective Income over the analysis period, the Mortgagee must downgrade and manually underwrite.”
It is easy to see that the FHA loan rulebook puts the burden of proof on the lender to determine if the self-employment income is within FHA standards or not.
Documentation Required For FHA Home Loan Borrowers Who Are Self-Employed
Your lender will require two years of tax filings including all schedules. Your tax records will play an important part in determining your actual, verifiable income and you will be required to submit personal and business tax documents.
Business tax records may not be required by the FHA (your lender may still require them) in cases where documentation shows two years of increasing income via self-employment and the other requirements have been met: the new loan must not be a cash-out refinance, and the cash to close is not coming from the applicant’s business accounts.
State law and other requirements may apply above and beyond FHA loan rules.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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