Self-employed people, from business owners to freelance workers, sacrifice the security of a steady paycheck for the independence of working the way they choose. That's great much of the time, but it can be a drawback when it comes to applying for credit, including trying to get an FHA loan. However, a little extra diligence can help self-employed borrowers qualify for an FHA loan.
Issues for Self-Employed Borrowers
The FHA considers a borrower to be self-employed if that borrower owns at least 25 percent of a business. Such self-employed borrowers qualify for an FHA loan only if they can jump through some extra hoops in order to provide a reasonable amount of assurance about their ability to earn enough money to make their loan payments. Here are some of the issues involved:
FHA underwriting standards require self-employed borrowers to provide two years worth of signed tax returns for themselves personally, and their business if it is structured as a corporation or a partnership. The individual must also provide a current year-to-date profit and loss statement as well as a balance sheet. In addition to providing personal credit information, the applicant must also make available a credit report on the business if it is a separate legal entity.
The applicant must provide two years worth of earnings history for the current business at a level that is stable and sufficient enough to meet payment requirements. Alternatively, one year of earnings history for the current business will suffice if the applicant can also show a history of earning a sufficient level of income in a similar occupation prior to becoming self-employed, or can demonstrate a combination of at least a year's earnings plus a year's formal education or training. However, if there is less than a year of self-employment history, the applicant's income will not be considered sufficient. In addition to being at an adequate level, income must be stable or growing. Income that has declined significantly will not be considered stable enough for the applicant to qualify, even if that income is currently at a level sufficient enough to meet payment obligations.
Lenders will need to know that you can meet your current financial obligations as well as those of the FHA loan, and this will include both any regular personal payments you need to make as well as your business expenses and debt servicing. So, you may not want your business to take on a substantial payment obligation just prior to your applying for an FHA loan personally.
In addition to demonstrating the level and stability of your business earnings, you can help earn the confidence of lenders by showing them a summary business plan that indicates how you will generate business and operate costs effectively.
Small businesses often run into trouble with making their payments on a timely basis, but be advised that this is just as important for a self-employed borrower as your personal credit history. In essence, lenders are going to look at your business as an extension of yourself, and if your business has not been reliable about meeting its obligations on time, lenders are going to worry about your ability to do so, too.
Taking care of these issues can help self-employed borrowers qualify for an FHA loan, but beyond that, things like keeping good records, managing earnings and expenses responsibly, mapping out a sound business plan, and taking care of your financial obligations are all practices that should help the long-term success of your business.