March 27, 2014
FHA home loan rules include a requirement that the lender verify employment and sources of income. The reasons for this verification include making sure the job and wages are stable and likely to continue to help the borrower pay the monthly mortgage bills. But what are the rules for borrowers who are self employed or who work at a family business?
The rules that cover these requirements are found in HUD 4155.1 Chapter Four, Section D. Under the heading, “General Information on Self Employed Borrowers and Income Analysis” we find the following instructions to the lender:
“Income from self employment is considered stable and effective, if the borrower has been self employed for two or more years.” However, the FHA loan rules do make a distinction between someone who owns a family business–a self employed person–and someone who works at that business as an employee. According to Chapter Four:
“In addition to normal employment verification, a borrower employed by a family-owned business is required to provide evidence that he/she is not an owner of the business, which may include
• copies of signed personal tax returns, or
• a signed copy of the corporate tax return showing ownership percentage.”
The income received by an employee of the family owned business may be treated as typical wage income depending on the circumstances rather than self-employment income. Who is considered a self-employed person as opposed to someone who is simply an employee of the family business? Chapter Four says that depends on the ownership interest of that employee.
“A borrower with a 25% or greater ownership interest in a business is considered self employed for FHA loan underwriting purposes.”
As you can see this is an important issue as self-employed borrowers have more documentation to provide and additional standards and guidelines which must be met.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.
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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