News, updates, and explanations to keep you informed.
Can Self-Employed Individuals Qualify for an FHA Home Loan?
One myth about getting an FHA home loan is that self-employed people can't get approval for FHA mortgage; their employment status is thought to make approval out of the question. While it can be more difficult for some in the early stages of a small business to make a profit, being self-employed is not the "deal breaker" on an FHA loan application some might think it to be.
Just take a look forms and FHA mortgage pages on lender websites—banks offering pre-approval or electronic applications for FHA loans usually have a web page offering FHA loan checklists which include information on what to submit if you are self-employed. If self-employed people were automatically turned down for an FHA loan, they wouldn't be given advice on what to submit in order to apply.
With that in mind, it can be more difficult to qualify for an FHA loan, FHA refinance or homeowner bailout program as a self employed person for one simple reason. If you don't keep good records, your lender won't be able to see that your business is profitable and gives you the income you need to pay your bills on time. You may be quite successful in your small business or as a freelancer; if you can’t show on paper that you have a consistent income, the FHA can’t conclude that you are a good risk.
Your FHA loan application requires information on the nature of your business, but also what your net income was compared to business expenses. Self-employed people are often asked to provide a profit-loss statement, which helps the FHA and your lender see how successful your business is. If you don’t keep good records of legitimate business expenses, don’t have your taxes professionally prepared, and only have a rough idea of your profits and losses, it's much harder for the FHA to back your loan with confidence--you won't be approved for an FHA home loan without detailed business records.
This is why self-employed people should take more time than people with traditional occupations when it comes time to buy a home. In typical cases the recommended preparation and planning stage can last as a long as a year—especially if there are issues with credit repair or disputes on credit reports to deal with. If you are self-employed, you should be ready to show a stream of reliable income for two years and have a set of meticulously kept records to back up the information you put on the FHA loan application.
That means solid record-keeping, being aggressive about finding steady work or making your business model pay, and properly filing your taxes and related paperwork. Unlike those with traditional careers, there’s an additional layer of scrutiny to your work and income. Did you have a long period of inactivity between contracts? Did your business shut down for a time? Your loan officer will want to know why and whether such periods of inactivity could happen again or how they affect your ability to make your FHA mortgage payments.
It is true that it is more difficult for self-employed people to get an FHA mortgage, but is it impossible? No--if you plan for extra scrutiny to your personal bottom line, are meticulous about good record keeping, and can show your loan officer your business model is working.