October 6, 2016
A growing number of Americans are either self-employed, contract workers, freelance, or otherwise employed in ways that don’t involve being on a company payroll and receiving traditional benefits, and health insurance. FHA home loans are definitely possible for those who are freelance, self-employed, etc. but it’s important to know what the FHA requires on a basic level for applicants who work in this way.
HUD 4000.1 has some instructions to the lender for verifying self-employment income, for example, and these instructions may involve more paperwork than for other types of borrowers. To start, HUD 4000.1 spells out its definition of self-employment income:
“Self-Employment Income refers to income generated by a business in which the Borrower has a 25 percent or greater ownership interest.”
That may seem different than freelance income where the applicant does not own a share of the business concerns he or she has as clients. But if a borrower is a freelance worker, earning money with a client or group of clients, it’s likely that the borrower is running a business-one that provides said services to those clients. So it’s important to keep that notion in mind when thinking about the nature of your self-employed earnings.
Lender standards may also factor in here, so requirements and definitions of “self employment” may vary depending on the financial institution.
HUD 4000.1 goes on to instruct the lender, “The Mortgagee may consider Self-Employment Income if the Borrower has been self-employed for at least two years.” That is an important thing to remember when planning your FHA mortgage loan.
HUD 4000.1 adds to the above, “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.”
The lender is also instructed, “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.”
Your loan officer will require tax returns and other paperwork such as profit-and-loss statements. You’ll be expected to show the development of your self-employment work over the last two years or more depending on a variety of factors including lender standards.
These issues may seem a bit more complex for some borrowers, but FHA loan rules definitely make provisions for borrowers who work for themselves, own their own businesses, etc.
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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