Qualifying for a home loan can be more difficult when you’re self-employed, whether you’re seeking a conventional loan or FHA loan. But don’t let that discourage you from buying a home.
Here are five tips that can help you get into your dream home with an FHA loan when you’re self-employed.
- Establish a self-employment track record
- Review your credit score and history
- Pay down credit cards and other debt to improve your DTI
- Save so you can offer a higher down payment
- Shop online to compare rates and fees
Shopping online for an FHA loan is an excellent way to improve your chances of qualifying for an FHA loan.
It can also save you money — FHA lenders (not the government) offer FHA loans, and each sets its own loan rates and fees. Tips An FHA loan when you’re self-employed can seem daunting at first glance. Given how common self-employment has become, it’s essential to understand how to qualify for an FHA loan if you’re self-employed.
And there’s good news for business owners:
You can buy a home with an FHA loan when you’re self-employed.
This guide to qualifying for an FHA loan when you’re self-employed will cover everything from proving your income to your credit score and more.
Can Any Business Owner Get an FHA Loan?
You might think getting a mortgage is only possible if you have a “real job.” But that simply isn’t true. Don’t give up qualifying for an FHA loan if you’re self-employed.
The trick is that you have to meet the FHA definition of a self-employed borrower — you have to hold a 25% or more ownership interest in the business and prove you’ve been self-employed for at least two years.
You must also have the right “type” of business. The FHA recognizes four basic structures:
- Sole proprietorships
- Corporations
- Limited liability or “S” corporations
- Partnerships
Because most self-employed people fall under one of those options, you should have no trouble meeting that requirement.
What Documents Do You Need to Apply?
The exact documentation you need can depend on the lender or underwriter of your mortgage loan.
Generally, self-employed documentation includes:
- Last 2 years of individual tax returns
- Current year Profit and Loss (P&L) statement
The Federal Housing Administration (FHA) — the organization that backs FHA loans — released additional temporary FHA guidelines in July 2020 for self-employed borrowers. Specifically, it requires you to verify continuing income.
What does that mean?
Your lender may ask you for evidence of current work (contracts or invoices), documentation of business receipts, lender certification that your business is open and operating, or business website activity that shows recent business operations.
Self Employed Income for an FHA Loan
There are specific FHA loan requirements for what counts as income when applying for a self-employed FHA home loan. Your income must be generated by a business in which you own at least 25% of ownership interest.
If you’re the only owner, you meet the requirement. If you have a 50/50 partner, it counts, too. But if you invested in a business and owned less than 25%, your self-employed income wouldn’t be proof of income.
Remember you must also have been self-employed for at least two years. Generally, your individual tax returns are enough to satisfy any FHA lender.
But here’s the thing…
The lender can ask for your business tax returns under certain circumstances:
- If your tax returns show a decrease in self-employment income
- If your business account is paying the funds for the closing costs
- If you’re seeking a cash-out refinance
So, how is self-employed income calculated for an FHA loan?
Your mortgage company has two options — the average gross self-employment income earned over the past two years or the average gross self-employment income earned over the previous year.
The lender has to use the lesser of the two options.
What If You Have Business Debt on Your Personal Credit Report?
Many business owners self-fund parts of their company. If you used a personal loan, credit card, or another type of personal debt to get cash for your business, your credit report would show it.
The good news is you can still get an FHA loan even if you have business debt on your personal credit report.
If you’re in this situation, the FHA Handbook requires you to meet two requirements:
- Show proof that the debt is paid out of company funds
- Demonstrate the debt was considered in the business’s cash flow analysis
Your bookkeeper or accountant should be able to help you track down documentation to give to your lender. Then, you can get preapproved or prequalified for your home loan.
Can You Use Business Funds to Close an FHA Loan?
Yes, you can use money from your business to pay for closing costs or the down payment. It can be an excellent solution if your personal bank account doesn’t have enough cash to cover those costs.
There’s just one thing to remember:
When you use funds from your business accounts, you must provide your most recent two years of business tax returns to your lender.
FHA Loan Self Employed with a Cosigner
You can use a cosigner when applying for a self-employed FHA loan. It can help you meet FHA guidelines if you have a high debt-to-income (DTI) or need additional income to qualify.
Lenders use your DTI to determine your ability to make the monthly mortgage payments. If you have a high DTI, more of your income is tied up, and you may struggle to pay the FHA loan. But a cosigner can help with that.
A cosigner can also help if your income is high, but you haven’t been self-employed for at least two years. Here, the lender considers your cosigner’s income to qualify your loan application.
5 Tips to Get an FHA Loan When You’re Self Employed
Qualifying for a home loan can be more difficult when you’re self-employed, whether you’re seeking a conventional loan or FHA loan. But don’t let that discourage you from buying a home.
Here are five tips that can help you get into your dream home with an FHA loan when you’re self-employed.
- Establish a self-employment track record
- Review your credit score and history
- Pay down credit cards and other debt to improve your DTI
- Save so you can offer a higher down payment
- Shop online to compare rates and fees
Shopping online for an FHA loan is an excellent way to improve your chances of qualifying for an FHA loan.
It can also save you money — FHA lenders (not the government) offer FHA loans, and each sets its own loan rates and fees.
Self Employed FHA Home Loan With the Help of a Mortgage Broker
If you are self-employed and need help getting a mortgage, you may find working with a mortgage broker is your best bet.
Let the Wendy Thompson Team help.
We’re FHA loan experts, and we help both individuals and business owners apply (and get approved!) for FHA loans. Start your quote online today or call Wendy’s Team directly at (901) 461-8858 to make your homeownership dreams come true!
