August 1, 2014
A reader asks, “I am applying for an FHA loan, I left a permanent position of 3 years to do contract work which I have done for over a year now. I am currently on my 2nd assignment which still has another 6 months minimum left on it, with a possibility of an extension – I am a W-2 contractor (not 1099.) Would I be disqualified since I only have a one-year history as a contractor vs being a permanent employee?”
Let’s examine what the FHA loan rules printed in HUD 4155.1 say about income and employment verification. To star with, let’s look at the FHA instructions to the lender for analyzing employment:
“When analyzing the probability of continued employment, the lender must examine
• the borrower’s past employment record
• qualifications for the position
• previous training and education, and
• the employer’s confirmation of continued employment.
The underwriter should favorably consider a borrower for a mortgage if he/she changes jobs frequently within the same line of work, but continues to advance in income or benefits. In this analysis, income stability takes precedence over job stability.”
Furthermore:
“The lender must analyze the income of each borrower who will be obligated for the mortgage debt to determine whether the borrower’s income level can be reasonably expected to continue through at least the first three years of the mortgage loan.”
Contract employees may not necessarily be considered self-employed borrowers by the FHA rulebook depending on circumstances, but if those circumstances DO qualify a borrower as “self employed” different requirements may apply. The lender may also have a specific definition of self employment which may factor in. According to the FHA, “A borrower with a 25% or greater ownership interest in a business is considered self employed for FHA loan underwriting purposes.” If a borrower IS considered self-employed by the lender, FHA loan rules advise:
“Income from self employment is considered stable and effective, if the borrower has been self employed for two or more years…A combination of one year of employment and formal education or training in the line of work in which the individual is self employed or in a related occupation is also acceptable.”
When it comes to new employment income, FHA loan rules state:
“Projected income is acceptable for qualifying purposes for a borrower scheduled to start a new job within 60 days of loan closing if there is a guaranteed, non-revocable contract for employment. The lender must verify that the borrower will have sufficient income or cash reserves to support the mortgage payment and any other obligations between loan closing and the start of employment. The loan is not eligible for endorsement if the loan closes more than 60 days before the borrower starts the new job. To be eligible for endorsement, the lender must obtain from the borrower a pay stub or other acceptable evidence indicating that he/she has started the new job.”
Could this apply to contract work? It depends on circumstances. Borrowers should discuss the specifics of their situation with the loan officer.
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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