fha loan self employed

How To Get Approved For An FHA Loan When Self-Employed

Getting approved for a mortgage can be more challenging when you are self-employed rather than having a traditional W-2 job. Since your income tends to fluctuate more month-to-month, lenders want to see stability before approving an FHA loan. However, FHA loans can be a great option for self-employed borrowers if you properly prepare. This comprehensive guide covers everything you need to know about qualifying for an FHA loan if self-employed

FHA Loan OverviewFHA loans are government-backed mortgages that allow for lower down payments and more flexible credit requirements than conventional loans Some key attributes include

• Down payments as low as 3.5%
• Minimum 580 credit score
• Higher debt-to-income ratios allowed
• No mortgage insurance penalty when you refinance later

These features make FHA loans appealing to first-time home buyers and those with past credit issues. While they are ideal for W-2 employees, self-employed borrowers can also qualify if they meet some additional criteria.

FHA Self-Employed Requirements
To qualify for an FHA loan when self-employed, you’ll need to meet these general requirements:

• 2 years minimum time in business – Your company must have been operating for at least 2 years to prove sustainability.

• 25% business ownership – You’ll need to own at least 25% stake in the business to count its income.

• Sufficient personal income – Your self-employment income must be stable enough to afford the mortgage.

• 500+ credit score – While 580 is the minimum FHA score, most lenders require at least 500-550.

• Low debt-to-income ratio – Ideally 40-50% or less total debt-to-income.

-Clean recent credit history – Any major delinquencies or collections accounts should be older than 2 years.

Documenting Income
The main challenge when self-employed is providing acceptable income documentation. Rather than relying on a W-2, you’ll need to supply proof directly from your business.

• Tax returns – Past 2 years personal & business returns

• Profit and loss statements

• 1099 forms if contractor

• Business bank statements

• Invoice and accounts receivable documentation

Lenders need to review your gross annual income minus expenses to calculate your discretionary income for mortgage approval. Stable year-over-year earnings show you can reliably make mortgage payments.

Business Documentation
In addition to income docs, you’ll also need to provide business formation documentation:

• Articles of incorporation if incorporated

• Business licenses

• Commercial lease agreements

• Business bank statements and tax ID

• Proof of active business insurance

This verifies to the lender that you have an established, legitimate business. Make sure all business addresses, licenses, and documentation is current.

Tips for Securing Approval
When applying for an FHA loan as a self-employed borrower, keep these tips in mind:

• Have a two year history of steady 1099 or K-1 income. Large fluctuations in income year-to-year raise concerns over stability for underwriters.

• Be able to show your business is profitable. Reporting consistent losses is red flag.

• Keep business and personal finances strictly separate. Commingling funds hurts your approval odds.

• Get your personal debt and credit score in good shape. Pay down debts and maintain on-time payments.

• Be conservative on your loan amount and don’t max out your DTI. Seek a mortgage you can truly afford.

• Work with a mortgage lender familiar with self-employed borrowers. They’ll guide you on the right documentation to provide upfront.

The more organized you are with presenting your personal and business financial details, the easier the approval process will be.

Self-Employment Occupations that Qualify
One benefit of FHA loans is that they accept self-employment income from a wide range of occupations, including:

• Sole proprietorships
• Freelancers
• Independent contractors
• Gig economy workers
• Small business owners
• Partners in a partnership
• Franchise owners

So you don’t have to be running a major corporation. As long as you meet the income, credit, and documentation requirements, most legitimate self-employment situations are eligible under FHA program guidelines.

However, there are a few exceptions:

• Working for your own single member LLC
• Businesses operating informally without proper registration

These types of unincorporated arrangements generally don’t qualify for FHA loans. Forming a proper business entity is recommended.

Factors That Help Approval Chances

When underwriters review an FHA loan application for a self-employed borrower, there are a few factors that can increase the likelihood of approval:

• Number of years self-employed – The longer you’ve been successfully self-employed, the better. 5+ years is ideal.

• Higher down payment – Putting 10-20% down shows you have reserves and lowers monthly costs.

• Solid business credit – Having credit accounts in your business’s name that are in good standing.

• Increasing revenue – Showing growth in your income over recent years.

• Lower DTI ratio – Keeping your total monthly debts lower relative to income.

• High personal credit scores – Scores in the 600s or higher make approval easier.

• Home office deduction – If you claim a home office tax deduction this can supplement your income.

Essentially, the more financial stability and lower risk factors you can present, the better your chances. Underwriters will be looking closely at both your personal and business finances.

Requirements for Specific Business Structures
Beyond the general self-employed requirements, some business structures have additional steps to qualify:

Sole Proprietor

• Submit schedule C tax forms
• Have 580 personal credit score
• Have under 50% DTI ratio

Partnership

• Must be general partner with 25% ownership
• Need partnership K-1 and tax returns
• Apply underwritten solely on your portion of income

S-Corporation

• Must own 25% of shares
• Provide K-1s and 1120S returns
• Two year’s company returns required

C-Corporation

• Need 25% minimum ownership
• Two years 1120 corporate tax returns
• K-1 forms showing your share of income

Underwriters will review your personal and business tax documents carefully to fully verify your income depending on your entity type.

Getting Multiple Self-Employed Loans
The FHA program does allow borrowers to have multiple FHA loans at the same time if you qualify. However, there are stricter occupancy rules:

One FHA Loan – No restrictions on occupancy

Two FHA Loans – One must be owner occupied as your primary residence

Three FHA Loans – Two must be owner occupied primary residences

Four FHA Loans – Three must be owner occupied primary residences

In this way, the FHA prevents borrowers from relying too heavily on rental income from FHA-backed investment properties. As long as you follow the occupancy rules, you can qualify for multiple mortgages.

Being approved for several mortgages requires meticulous financial records and a higher net worth. Work with an experienced lender familiar with FHA guidelines around multiple loans.

Self-Employed Homeowners Occupying the Property

In most cases, self-employed borrowers must plan to live in the home as their primary residence for the lender to approve the mortgage. This is because owner-occupancy is looked upon favorably by the FHA. It indicates you need a place to live rather than just using the funds from the loan to invest in or flip properties.

However, some exceptions exist:

• Lower FICO scores – Borrowers with credit scores below 620 will likely need to occupy the home regardless of other factors.

• Insufficient reserves – Not having 12 months of mortgage payments saved can require occupancy.

• High DTI ratio – DTI over 55% often needs owner-occupancy to offset risk.

Unless you have a strong application with ample assets, strong credit, and low DTI, occupancy is generally expected. Investment property loans face tighter scrutiny.

Getting Approved While Using 1099 Income

Borrowers who work as independent contractors and earn 1099 income can qualify, but will need to provide ample documentation including:

• Two years 1099 tax forms

• 1099 transcripts directly from the IRS

• An explanation of the nature of contracts

• Business invoices, contracts, and receipts

Having diverse 1099 income from multiple clients helps demonstrate stability. Relying too heavily on one or two core clients raises risk of disruption if those relationships dissolve. Underwriters like to see diversity of 1099 income sources when approving these loans.

Seeking Loan Approval for Freelancers

Freelancers can also obtain FHA loans with proper documentation of freelance income such as:

• Two years tax returns showing freelance income

• Current year profit and loss statement

• Business bank statements showing deposits

• Receipts for project payments

• List of clients and examples of contracts

Ideally your freelance projects will occur with enough frequency throughout the year to stabilize