There is a myth that persists in the mortgage lending world that you cannot get an FHA loan if you are self-employed. This is not true. While it is true that underwriters will scrutinize the self-employed mortgage application carefully, with proper preparation, a self-employed person can get qualified for a home loan insured by the FHA easier than most realize. Many consumers do not realize that FHA insures self-employed mortgage loans, but they do.
Learn How to Prepare for a Self-Employed Mortgage
Becoming a homeowner is a dream for many, and if you’re self-employed, you might be wondering how to navigate the mortgage application process. While it can be more complex for self-employed individuals, obtaining a home loan is entirely possible with the right approach.
Securing a self-employed home loan may require more effort, but it’s entirely achievable. By following these steps and working with knowledgeable professionals, you can make your dream of homeownership a reality, even if you need to get a self-employed mortgage.
Self Employed Home Buyers Should Consider a FHA Mortgage with Flexible Terms and Competitive Pricing.
Here’s a comprehensive guide to help you secure a self-employed home loan: Most independent contractors and business owners search for terms like, the “stated income mortgage” or the “no doc mortgage”, but rarely do they consider the Federal Housing Administration. Yet somehow, FHA has taken over some of the market-share for the self-employed borrowers in the Unite States. FHA has built a strong reputation with sub-prime mortgage lenders because the encourage more flexibility with credit and self-employment.
Remember these following FHA for the self-employed tips:
#1 Keep Good Records
One of the first steps is to gather your financial documents, including tax returns, bank statements, and profit and loss statements for your business. Lenders will want to see at least two years of tax returns to assess your income stability.
It’s vital to keep your personal and business finances separate. Ensure that your business financial records are well-organized and accurate.
The biggest obstacle to the self-employed getting an FHA mortgage is keeping accurate income and tax records. You can be a very successful self-employed person with a great small business. Perhaps you bring in hundreds of thousands per year and that is great news.
But if you cannot show on paper that you are earning money from your business and paying taxes on that income, you will have difficulty getting a mortgage.
The FHA underwriter needs to see that you have a consistent source of income so that they can make a judgment that you will be able to pay back the loan. FHA-requirements are very reasonable, but the underwriters will still request documentation.
Your FHA loan application will require you to show that you are working and that you have a sufficient net income to pay your bills, including your mortgage.
#2 Reduce Business Deductions
A common problem for many self-employed: You take lots of business deductions to reduce your taxable income. This is fine and perfectly legal to do, as long as the business expenses are legitimate.
The problem can occur when you are applying for a mortgage. If your income is $50,000 and you take $40,000 of deductions, the loan underwriter is going to wonder how you can manage to pay your mortgage.
That is why you may need to consider reducing your business deductions at least in the tax year before you apply for a mortgage, and possibly two years. In this way, you will be able to show on paper that you can afford a mortgage.
#3 Improve Your Credit Score
A strong credit score is essential for mortgage approval. Check your credit report for errors and work on improving your score by paying bills on time and reducing outstanding debts. Most FHA mortgage lenders look for a credit score of 620 or higher, but a score of 700 or above can give you better terms.
#5 Find Steady Work
One of the challenges of being self-employed is that you can go through periods where you have less stable income. If you have planned in advance, this is not usually a problem. But when you apply for a self employed home loan, the underwriter will wonder if you had no business come in for three months.
Remember, it is the job of the underwriter to make a judgment based mostly upon facts on paper on your ability to pay off your mortgage. FHA does not want you to end up needing a homeowner bailout program to save your home.
So, you should ideally be applying for a mortgage when you have a solid stream of income from steady sources and/or sales.
If you are just starting your small business, we recommend that you get at least a year of steady income coming in on paper before you apply for a mortgage.
#6 Prepare for a Year
Most people with regular jobs need to prepare to get a mortgage, but for the self-employed, it usually pays to prepare for at least a year.
Make sure that your credit rating is in good shape and that you have a reasonable amount of credit card debt. Hint – If all you can afford month in and out is to make minimum payments, your credit card debt is out of control. Pay it down as much as you can before you apply.
If you have any late payments in the last year on your credit report, you want to stop doing that right away. Get at least a year of no late payments and your credit score will rise.
Try to get steady income coming in as much as you can so that the underwriter will deem you a good risk.
Most FHA underwriters will want to see two years of tax returns to evaluate before they approve you for a self-employed mortgage. FHA says they do not insure no income verification loans, but in most cases the FHA streamline does not require the typical income documentation requested by underwriters.
See Today’s Rates on FHA Loans
#7 Be Sure Your Numbers Match
One thing that many home buyers aren’t aware of is that the FHA approved underwriter will require you to sign IRS Form 4506-T. This allows the FHA lender to request a copy of your tax transcripts for the last two years.
The underwriter needs to see that the income that you reported to the IRS matches what you put on your application. This is why you may want to reduce your business deductions for at least a year before you apply for a loan. Sure, you may pay more in taxes, but you have to show sufficient taxable income to get approved for a mortgage. Make sure that you verify the FHA max loan amount for your region. The loan limits vary by county across the nation.
#8. Consider a Larger Down Payment
Offering a larger down payment can increase your chances of loan approval. A higher down payment also reduces the risk for lenders.
While conventional mortgages typically require a 20% down payment, some loans may accept a lower percentage.
#9 Choose the Right Mortgage Type
Self-employed individuals have several mortgage options, including conventional loans, FHA loans, and VA loans. Each has its own requirements.
FHA loans are more flexible and may accept a lower credit score. VA loans are available for eligible veterans. Conventional loans often require a more substantial down payment and higher credit score.
#10 Show Consistent Income
Lenders want to see a stable income history. Fluctuating income can be challenging, so it’s essential to demonstrate consistent earnings over the past two years.
If your income has increased recently, it might be better to wait until you can provide two years of consistent income for a more favorable loan application. Lenders may require you to have several months’ worth of mortgage payments in cash reserves.
This proves you can handle unexpected financial challenges. Maintain a healthy business and personal savings account.
#11 Hire a Professional Accountant
A certified public accountant (CPA) can help you prepare accurate financial statements and tax returns that meet lender requirements.
A CPA can also provide a profit and loss statement that clearly presents your business’s financial health.
#12 Shop Around for Self-Employed Lenders:
Different lenders have various criteria for self-employed mortgage applicants. It’s essential to shop around and compare offers from multiple lenders.
Work with a mortgage broker who specializes in self-employed individuals; they can help you find a lender with suitable terms. Self-employed mortgage applications can be complex. Consulting a mortgage professional who understands the intricacies of self-employed income and mortgages can be invaluable.
They can guide you through the process and help you identify the right loan programs for your situation.
The Bottom Line on FHA and Self-Employed Mortgages
It is true that it is a bit more complicated to get an FHA loan with self-employed income. But as long as you can show adequate income to pay the mortgage on the house you want, and this is reflected in two years of tax returns for the previous two tax years, you should not have a problem getting a mortgage in most cases.
If you have credit of 680 or higher and have reasonable debt and decent income that is fairly stable, you should be able to be approved for an FHA mortgage fairly quickly.
About RefiGuide
Bryan Dornan is a financial journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has founded several mortgage and marketing companies and has worked as a loan officer and mortgage broker in the industry for over 25 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, and Linkedin
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