Uncovering Self Employed Mortgage Loans and the FHA Option

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Bryan Dornan

Lead Planet Founder

There is a myth that persists in the mortgage lending world that you cannot get an FHA loan if you are self-employed. This is not true. While it is true that underwriters will scrutinize the self-employed mortgage application carefully, with proper preparation, a self-employed person can get qualified for a home loan insured by the FHA easier than most realize.

Most independent contractors and business owners search for terms like, “stated income mortgage” or no income verification loans”, but rarely do they consider the Federal Housing Administration. Yet somehow, FHA has taken over some of the market-share for the self-employed borrowers in the Unite States.

Remember these following FHA for the self-employed tips:

#1 Keep Good Records

The biggest obstacle to the self-employed getting an FHA mortgage is keeping accurate income and tax records. You can be a very successful self-employed person with a great small business. Perhaps you bring in hundreds of thousands per year and that is great news.

But if you cannot show on paper that you are earning money from your business and paying taxes on that income, you will have difficulty getting a mortgage.

The FHA underwriter needs to see that you have a consistent source of income so that they can make a judgment that you will be able to pay back the loan.

Your mortgage application for an FHA loan will require you to show that you are working and that you have a sufficient net income to pay your bills, including your mortgage.

#2 Reduce Business Deductions

A common problem for many self-employed: You take lots of business deductions to reduce your taxable income. This is fine and perfectly legal to do, as long as the business expenses are legitimate.

The problem can occur when you are applying for a mortgage. If your income is $50,000 and you take $40,000 of deductions, the loan underwriter is going to wonder how you can manage to pay your mortgage.

That is why you may need to consider reducing your business deductions at least in the tax year before you apply for a mortgage, and possibly two years. In this way, you will be able to show on paper that you can afford a mortgage.

#3 Find Steady Work

One of the challenges of being self-employed is that you can go through periods where you have less stable income. If you have planned in advance, this is not usually a problem. But when you apply for a self employed home loan, the underwriter will wonder if you had no business come in for three months.

Remember, it is the job of the underwriter to make a judgment based mostly upon facts on paper on your ability to pay off your mortgage. FHA does not want you to end up needing a homeowner bailout program to save your home.

So, you should ideally be applying for a mortgage when you have a solid stream of income from steady sources and/or sales.

If you are just starting your small business, we recommend that you get at least a year of steady income coming in on paper before you apply for a mortgage.

self employed mortgage

#4 Prepare for a Year

Most people with regular jobs need to prepare to get a mortgage, but for the self-employed, it usually pays to prepare for at least a year.

Make sure that your credit rating is in good shape and that you have a reasonable amount of credit card debt. Hint – If all you can afford month in and out is to make minimum payments, your credit card debt is out of control. Pay it down as much as you can before you apply.

If you have any late payments in the last year on your credit report, you want to stop doing that right away. Get at least a year of no late payments and your credit score will rise.

Try to get steady income coming in as much as you can so that the underwriter will deem you a good risk.

Most FHA underwriters will want to see two years of tax returns to evaluate before they approve you for a self-employed mortgage. FHA says they do not insure no income verification loans, but in most cases the FHA streamline does not require the typical income documentation requested by underwriters.

#5 Be Sure Your Numbers Match

One thing that many home buyers aren’t aware of is that the FHA approved underwriter will require you to sign IRS Form 4506-T. This allows the FHA lender to request a copy of your tax transcripts for the last two years.

The underwriter needs to see that the income that you reported to the IRS matches what you put on your application. This is why you may want to reduce your business deductions for at least a year before you apply for a loan. Sure, you may pay more in taxes, but you have to show sufficient taxable income to get approved for a mortgage.

The Bottom Line

It is true that it is a bit more complicated to get an FHA loan with self-employed income. But as long as you can show adequate income to pay the mortgage on the house you want, and this is reflected in two years of tax returns for the previous two tax years, you should not have a problem getting a mortgage in most cases.

If you have credit of 680 or higher and have reasonable debt and decent income that is fairly stable, you should be able to be approved for an FHA mortgage fairly quickly.

About Bryan Dornan

With over 20 years in the mortgage industry, Bryan Dornan has started several companies, such as the Lead Planet, Mortgage Lenders Plus and the Refi Guide. Mr. Dornan has written hundreds of finance related articles in an effort to promote home-ownership to consumers across the United States.