Why are FHA loan rules different for family-owned business employees? Some borrowers fit this category-that where you work for the family business but have no ownership in it-and the rules are important to understand.
The FHA definition of income derived from a family owned business is specifically, “Family-Owned Business Income refers to Employment Income earned from a business owned by the Borrower’s family, but in which the Borrower is not an owner.”
The major difference in the FHA loan rules for small business owners versus those they employ (but who do not own a stake in the business) basically recognizes the difference between being an employee and an owner.
The rules for self-employed FHA home loan applicants differ from employees.
Self-employed borrowers are required to show that their employment is sustainable and that the income is likely to continue. They must file additional documentation with the lender including any required business plans, tax returns for business and personal categories (where applicable), show profit-and-loss statements, etc.
An employee of a family business who has no ownership stake in that business would not be required to provide such documentation since in theory they are typical employees and not small business owners.
The rules governing this issue are in HUD 4000.1, the FHA loan handbook. It says on this issue, “The Mortgagee must verify and document that the Borrower is not an owner in the family-owned business by using official business documents showing the ownership percentage.”
What documentation may be required? In addition to any paperwork the lender may require, HUD 4000.1 states, “Official business documents include corporate resolutions or other business organizational documents, business tax returns or Schedule K-1(IRS Form 1065), U.S. Return of Partnership Income, or an official letter from a certified public accountant on their business letterhead.”
“In addition to traditional or alternative documentation requirements, the Mortgagee must obtain copies of signed personal tax returns or tax transcripts.”
Additional lender standards may apply. State law, lender requirements, and other factors may affect how your loan proceeds under these circumstances.