Are there FHA home loans for self-employed borrowers? There’s a persistent myth about FHA loans and self-employment; that working for yourself is a serious disadvantage when it comes to home loan approval. What’s the reality?
FHA Home Loans Are Available For Financially Qualified Self-Employed Borrowers
FHA loan rules in HUD 4000.1 state that being self-employed is an acceptable form of primary income as long as that income meets certain criteria. Borrowers will be required to furnish tax returns, business plans, profit-and-loss statements and other documentation as required by the lender to verify income.
It may take some extra time to gather all the required information your lender needs, but you should come to the application or preapproval process knowing how your income has changed over time.
Self Employment Minimum Requirements Under FHA Home Loan Rules
HUD 4000.1, the FHA loan handbook, states that a borrower must be self-employed for a minimum length of time in order to be considered verifiable income.
“The Mortgagee may consider Self-Employment Income if the Borrower has been self-employed for at least two years. 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.”
FHA Loan Rules For Stability of Self-Employed Income
HUD 4000.1 spells out a minimum set of guidelines for the stability of self-employment income required for loan approval. “Stability” doesn’t necessarily translate into how frequent the income is, as we learn below:
“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.”
Additional FHA Lender Standards May Apply
The FHA loan rules quoted here are not the only ones that may affect your transaction. Lender standards will also factor into your income and employment requirements. If you aren’t sure how lender standards may supplement these requirements, ask a loan officer what that financial institution’s rules are for self-employed borrowers.
Self-employed borrowers should expect to give the lender multiple years’ worth of tax returns and other relevant documentation to show how the self-employed income has progressed over the required minimum employment time frame.