October 20, 2015
Ever since the FHA and HUD published the new guidelines for single-family home loans, HUD 4000.1, we have been reviewing the new rules and discussing important issues as the new rules affect them. One of these areas has to do with income verification for credit-check-required FHA mortgages and refinance loans.
The last time we discussed the FHA loan rules on income verification for self-employed borrowers, the old FHA loan rulebooks HUD 4155.1 and HUD 4155.2 were still in effect. What does HUD 4000.1, which supersedes all previous FHA loan rules for single family mortgage loans, have to say about borrowers who are self-employed?
For a start, the FHA defines what it means by “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.”
When a borrower meets that criteria, the lender must then move to the rules governing how long the applicant must be self-employed in order for his or her income to count toward the debt-to-income ratio calculation:
“The Mortgagee may consider Self-Employment Income if the Borrower has been self-employed for at least two years.” But what about FHA loan applicants who have not been working for themselves for at least 24 months? Are there any possibilities for them? According to HUD 4000.1:
“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.”
But that’s not all–the lender must also analyze earnings and income patterns to see whether or not the self employment experience has been a successful one:
“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.”
These are all important things to know about being a self-employed FHA loan applicant. If you aren’t sure whether you might qualify for an FHA mortgage as a self-employed person, one important step you can take before starting the journey toward home ownership is to contact the FHA directly and request a referral to a local HUD-approved housing counselor. You could learn a great deal about getting ready for your FHA loan application.
Do you work in residential real estate? You should know about the free tool offered by FHA.com. It’s designed especially for real estate websites–a widget that displays FHA loan limits for the counties serviced by those websites.
It is easy 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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