February 20, 2020

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FHA Loans And Income Verification Requirements

FHA loan income verification requirements include submitting tax data as part of the application process. Your lender may require tax returns and other paperwork; depending on the transaction these requirements may include additional forms of documentation.

A reader got in touch recently in our comments section to ask about these income verification issues.

“Our lender is asking for two years of tax returns. We have not filed for 2016 yet. We apply for and get an extension every year and have until October since we are freelancers…Can we just submit 2014 & 2015 for now to apply for the loan? We have pay stubs for 2016 as proof for income and it is greater than what we have made the priors years. Although, it seems to be a problem that we have not filed for 2016.”

FHA loan rules include instructions to the lender for self-employed borrowers. The term “self-employed” itself may be subject to interpretation in some cases, but where self-employment income is concerned, FHA loan rules do provide the lender with a specific definition:

“Self-Employment Income refers to income generated by a business in which the Borrower has a 25 percent or greater ownership interest. There are four basic types of business structures. They include:

– sole proprietorship;
– corporations;
– limited liability or S corporations; and
– partnerships.”

Assuming that this definition fits in this case, HUD 4000.1 instructs the lender specifically where income verification is concerned:

“The Mortgagee must obtain complete individual federal income tax returns for the most recent two years, including all schedules. The Mortgagee must obtain the Borrowers business tax returns for the most recent two years unless the following criteria are met:

– individual federal income tax returns show increasing Self-Employment Income over the past two years;
– funds to close are not coming from business accounts; and
– the Mortgage to be insured is not a cash-out refinance.”

However, additional lender standards and/or state law may apply. That’s why the best answer to this question is, “Talk to your loan officer”. The FHA loan rules mentioned above aren’t the only ones that may apply. The participating lender may have requirements that also need to be met.

Joe Wallace - Staff Writer

By Joe Wallace

May 11, 2017

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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