January 9, 2013
A reader asks, “Are there specific rules for applicants who are self-employed or independent contractors and receive a 1099 instead of a W-2?”
Yes. Self-employed borrowers and independent contractors must have their income verified the same as more traditionally employed borrowers. For self-employed FHA loan applicants this may include additional paperwork; tax statements, proft-and-loss sheets, even business plans or other related documentation depending on the lender’s requirements.
Self-employed and contract workers have specific criteria that must be observed. What defines “self employed” as opposed to “contract”? You may be considered self-employed if you have a 25% or greater controlling interest in a business. The lender has to determine your level of ownership in a company.
A contract employee may not be required to submit the same documentation as a self-employed borrower but will be required to show proof of the relationship with the employer including tax forms, any contracts or agreements that show the terms and conditions of your employment, etc.
The key thing to remember in these situations is that the lender is looking for evidence of reliable income that is stable and likely to continue. This does not mean seasonal workers or those who change “employers” frequently as a natural part of doing business are out of luck for an FHA mortgage.
What it does mean is that the burden of proof is on the FHA loan applicant to properly explain the nature of the business and to prove the income is “likely to continue” even though it may seem on paper as though you are changing employers frequently. Freelancers, actors, musicians and other workers need to show on-paper patterns of employment that will show the lender you are indeed a good risk for the loan.
This means that contract and self-employed borrowers need to keep more careful records than those with “traditional” jobs, but if you have those records or can produce them, your chances of getting FHA loan approval are greater. It may not be as simple as you’d like the process to be, but it is possible if you understand going into the FHA loan process that more is required in these circumstances.
Do you have questions about FHA home loans? Ask us in the comments section.
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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