June 23, 2016
A reader asks, “I am working on getting an FHA loan and my lender asks that I provide W2s. I am self employed via my own business as well as had a regular job how will this affect my loan being that i have no W2 and that my taxes were done via 1099 and 1040 forms for myself and my business?”
In cases like these, the lender will require whatever tax documentation that is available to show proof of income. For self employed borrowers, the lender may also require additional documentation such as profit and loss statements, business plans, and other items that may be required.
Lender standards will apply so FHA loan rules and minimums are only part of the equation.
FHA loan rules in HUD 4000.1 do permit the lender to use self-employment income as verifiable income if it meets FHA standards. According to page 192 of HUD 4000.1:
“The Mortgagee may consider Self-Employment Income if the Borrower has been self-employed for at least two years.”
However, the next line on page 192 also instructs the lender:
“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.”
There are also certain factors that a lender must consider when reviewing this type of income to see if it can be included in the borrower’s debt-to-income ratio:
“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.”
As you can see from the above, self-employment income can be a bit more complicated, but if the income meets FHA standards it may be considered acceptable to the lender. It’s important to remember that lender requirements and even state law, where applicable, may apply so the final say in matters like these might depend on the lender.
Borrowers who are self employed should take extra time to locate and copy their tax documents, business plans, profit and loss statements and any other required paperwork before applying for the loan. You may be required to furnish several years’ worth of this documentation so it’s definitely advisable to get a head start on compiling it.
Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:
http://www.fha.com/fha_loan_limits_widget
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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