Gustan Cho The Mortgage Expert,
Publish On: December 5, 2021
HUD Self-Employment Guidelines allow self-employed borrowers to qualify for FHA loans. The borrower needs to have been self-employed for the past two years. Income and employment are one of the most important factors when qualifying for a mortgage. Lenders want to see and believe the borrower has the ability to repay their new mortgage loan after closing.
Mortgage Underwriters Are Concerned With Self-Employed Borrowers Past Two Years Of Adjusted Gross Income
Self-employed borrowers have added layered risk under the eyes of the lender. Statistics and data show that the first two years in any business start-up or commissioned job is the riskiest. If the person survives the first two years of being self-employed, the chances are they will be successful. W-2 wage earners are guaranteed their income by their places of employment. Due to the added risk on self-employed people, mortgage underwriters scrutinize self-employed borrowers more so than W-2 wage earners.
How Mortgage Underwriters Calculate Self-Employment Income When Calculating Mortgage Borrower”s Qualified Income
The best indicator of continued employment of self-employed borrowers is mortgage underwriters will determine the borrower’s ability to repay their new mortgage by looking at the prior two years of income and employment history. Self-employed people need to have been self-employed in the same business for the past two years. Mortgage underwriters will analyze and review the past two years’ income tax returns and see the trend of the borrower’s income. Some red flags underwriters will look for are declining income and/or irregular income. Lenders will average the past two years’ adjusted gross income of the borrower’s federal income taxes when calculating qualified income for self-employed borrowers. Underwriters will look at the amount of unreimbursed business expenses and the qualified income they will use is the adjusted gross income on their income tax returns.
In this ARTICLE, we will discuss and cover Self-Employment Rules And Regulations On FHA Home Loans.
HUD Self-Employment Guidelines: How Are Self-Employed Borrowers Qualified
Per HUD Self-Employment Guidelines, mortgage underwriters need to review the borrower’s income tax returns for the past two years.
Here are the basic HUD Self-Employment Guidelines On FHA Home Loans:
- Borrowers need to be self-employed for at least two years or longer
- The income used will be the average of the past two years of the adjusted gross income
- The income needs to be the same and/or increasing
- Declining income will be scrutinized and under review
- The mortgage underwriter may ask for the business license of the borrower’s business
- Mortgage underwriters will check for the business listing online to verify the physical location
- If the business is a home-based business, documentation will be required
- CPA letter may be required for audited financials
Both the individual and business tax returns will be underwritten if the borrower owns 25% or more of the business.
HUD Self-Employment Guidelines And Requirements
Borrowers need to meet the minimum HUD Agency Mortgage Guidelines.
Here are the minimum HUD Guidelines to qualify for self-employed mortgage loans:
- The borrower needs to have a minimum of a 580 credit score on 3.5% down payment FHA home purchase loans
- Borrowers with under 580 FICO down to 500 credit scores may qualify for FHA loans if they can put a 10% down payment on a home purchase
- Need to be in business for at least two years without declining income
- Two years of federal income tax returns with all schedules
- May require a profit and loss statement for the year to date
- Transcripts directly from the IRS
- IRS Tax form 4506, 4506T, or 8821
- There is a two-year waiting period after Chapter 7 bankruptcy
- There is a three year waiting period after a foreclosure, deed in lieu of foreclosure, short sale to qualify for an FHA loan
- Outstanding collections and/or charged-off accounts do not have to be paid off to qualify for an FHA loan
- Borrowers in a current active Chapter 13 bankruptcy repayment plan can qualify for an FHA loan one year into the payment plan with Trustee approval and manual underwriting
- No late payments during Chapter 13 bankruptcy repayment plan
- Chapter 13 bankruptcy does not have to be discharged
- There is no waiting period after the Chapter 13 bankruptcy discharge date
- Chapter 13 bankruptcy that has been discharged but not seasoned for two years needs to be manually underwritten
- Gustan Cho Associates Mortgage Group are experts in manual underwriting
If the borrower has a one-time large write-off expense and it will not reoccur, that one-time large expense can be waived. If the borrower has a significant declining income the most recent year, the mortgage underwriter may disqualify the borrower’s income altogether.
Challenges With Qualifying For FHA Loan Being Self-Employed
One of the biggest challenges in qualifying for an FHA loan being self-employed is lenders require at least two years of seasoning. Two years of income tax returns are required. No significant declining income. One of the greatest benefits of being self-employed is you can write off many business expenses to save money in paying taxes. Unfortunately, this is not good when qualifying for a mortgage. One solution to offset the low adjusted gross income is adding non-occupant co-borrowers. HUD, the parent of FHA, allows the main borrower to add as many non-occupant co-borrowers to the mortgage. To qualify for a 3.5% down payment FHA loan with non-occupant co-borrowers, the non-occupant co-borrower needs to be related to the main borrower by law, blood, or marriage. Non-occupant co-borrowers not related by law, blood, or marriage can be added to the FHA loan. However, if the non-occupant co-borrower is not related to the main borrower, a 15% down payment is required per HUD Guidelines.
Options For Self-Employed Borrowers Who Declare Low Adjusted Gross Income
FHA loans are very popular for homebuyers due to the low down payment requirements and lenient credit guidelines. For 3.5% with a minimum of a 580 credit score, homebuyers can be eligible for an FHA home purchase loan. FHA allows the main borrower to add non-occupant co-borrowers. If the self-employed borrower’s income is low, they can explore the option of adding non-occupant co-borrowers to the loan. There is no limit on the number of non-occupant co-borrowers to be added to the main borrower. Another option for self-employed borrowers is exploring a different loan program. Gustan Cho Associates offers bank statement loans for self-employed borrowers. There is no income tax required. Borrowers’ 12-month bank deposits are averaged over the past 12 months. The average deposit in the past 12 months is used as the monthly income. Withdrawals do not matter. However, instead of a 3.5% down payment, the down payment required is a 20% down payment. Self-employed borrowers who need to qualify for a mortgage, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at alex@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.
