Getting an FHA loan while self-employed

Quick insights

• Federal Housing Administration (FHA) loansec-hl-fha-loan can be a good option for first-time homebuyers because of their eligibility requirements.
• Self-employed individuals may still qualify for an FHA loan, though certain documentation may be needed to confirm income.
• To help quicken the process, self-employed FHA loan applicants may want to gather income documentation ahead of time or work with a professional who can assist.

For many hopeful homebuyers, including self-employed individuals, FHA loans can be a solution for buying a first home. The FHA does not exclude the self-employed, such as those who own their own business or work as a contractor. However, you may be wondering what the FHA guidelines for self-employed borrowers are. In this article, we’ll provide a brief overview of the FHA loan process as it relates to self-employed homebuyers, including what forms of documentation you may need during the process.

Overview: FHA loans

FHA loans are specialized mortgages designed to help people achieve their dreams of homeownership. These loans, insured by the federal government, typically have more flexible approval criteria than conventional loans, including a lower credit score requirement. One major advantage of FHA loans is the down payment requirement, which may be as little as 3.5% of the home’s purchase price.ec-hl-us-hud

Eligibility criteria: FHA loans for self-employed people

The eligibility requirements for FHA loans are the same whether you’re self-employed or more traditionally employed. FHA qualification criteria generally extend to:

• Credit score: You need to have a credit score to be eligible for an FHA loan. FHA loans have a lower credit score requirement than most home loans.
• Property requirements: To qualify for this type of loan, you will need to choose a home that falls within FHA loan limits, which are updated on an annual basis. Limits vary by county and number of units in the home. You can check the current limits on the Housing and Urban Development website.
• Work with an FHA-approved lender: While these loans are insured by the federal government, the money needs to come from an approved lender. As a note, Chase is an FHA-approved lender.
• Debt-to-income (DTI) ratio: While not part of FHA-imposed criteria, mortgage lenders generally want to confirm that an applicant’s debts are not too large in proportion to their income. Examples of existing debts that factor into DTI ratio include credit cards and car payments.
• Stable income: Applicants must be able to demonstrate a stable income, which may be more complex for a self-employed person. The documents a lender requests to verify an applicant’s income can vary.

Income-verification documents for self-employed applicants

As a self-employed person, you might need additional documentation to verify your income for an FHA loan. While the exact requirements may vary depending on the lender you choose to work with, the documentation you may be asked to provide could include:

• Tax returns: For a self-employed person, these may potentially include IRS Form 1040 Schedule C (profit or loss from a sole-proprietorship business) and Schedule SE (self-employment tax).
• Bank statements: You may want or need to provide bank statements showing regular income deposits and business expenses.
• Contracts or agreements: Written confirmations of ongoing work may be useful for income verification for an FHA loan.
• Business licenses or permits: You may want to gather documents which can further confirm the legitimacy of your business, such as a government-provided license or permit.
• Year-to-date financial statements: A document which shows a current snapshot of the business’ financial condition may be helpful to verify your income.
• A CPA letter or accountant’s statement: A signed document from a certified public accountant (CPA) can help give credibility to your income claim.

Don’t be surprised if your lender comes back with a request (or multiple requests) for additional documentation. Approaching each request promptly and accurately can help avoid delays in the loan approval process.

Preparing for the loan application process

Depending on how you look at it, preparing a home loan application as a self-employed person starts with how you keep your records. Those who are less organized or detailed with their financial records may find it more difficult to extract the necessary information for a loan application at a later date. Working with an accountant, either continuously as part of managing your business or just to prepare for your loan, can help ensure your files are organized, accurate and up to date.

Overcoming challenges with income verification

Individuals with fluctuating incomes and those who have recently become self-employed may have more difficulty making their case to a lender. To improve your position as a potential borrower, strategies you may want to consider include:

• Making a larger down payment: A larger down payment means a smaller loan for the lender, which lessens the overall perceived risk of the loan.
• Adding a co-signer to your loan: Having a reliable co-signer attached to your loan can also help strengthen a potential lender’s confidence that the borrowed money will be repaid.
• Improving your credit score: Having a strong credit profile, showing a long history of responsible credit use, may help you appear more reliable as a potential borrower.
• Improving your DTI: With a higher DTI, the loan’s affordability may be in greater question. Lowering your debt-to-income ratio can help indicate to a lender that you’re able to afford the mortgage.
• Investigate different lenders: Shopping for the right loan is important regardless of your employment status. You may find that some lenders are more accommodating to self-employed applicants than others.

In conclusion

Being self-employed does not exclude you from applying for an FHA loan. While FHA loan income requirements for self-employed people aren’t set to a specific number, applicants will need to be able to provide documentation to demonstrate the stable income necessary to make monthly mortgage payments. Chase is an FHA-approved lender. If you wish to discuss your options relating to FHA loans as a self-employed person, consider reaching out to one of our Home Lending Advisors.