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FHA Loan Myths -- The Self-employed and FHA Loan

Qualification

One of the biggest myths about getting an FHA home loan?

The idea that self-employed people are automatically

disqualified for an FHA mortgage because of their

employment status. While it’s true that it’s tougher for

some in the early stages of a small business to make ends

meet, being self-employed is not the kiss of death on an

FHA loan application.

Proof of this can be found on the forms and FHA mortgage

pages of lender websites—most financial institutions

offering FHA loans offer a page on the bank’s website

offering “FHA loan prep” checklists which include advice on

what to submit if you are self-employed. The notion that

you can’t qualify if you work for yourself isn’t shared by

lenders.

That said, it can be more difficult for some small business

owners to qualify for an FHA loan, FHA refinance or

homeowner bailout program for one simple reason; not

keeping good records. You may be quite successful in your

small business or as a freelance contractor, but 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 you to show not only

that you were gainfully employed, but also what your net

income was compared to business expenses. Self-employed

people will also need to show a profit-loss statement. If

you don’t keep good records of legitimate business

expenses, don’t have your taxes professionally prepared,

and guesstimate your profits and losses, the FHA loan

process could come to a halt very quickly for you. The

question your loan officer will ask goes from “Can you

afford your monthly FHA home loan payments?” to, “How long

until my applicant needs some kind of homeowner bailout

program?”

This is why self-employed people should take plenty of

extra time when planning to buy a home. For some, the

average prep time is about one year—especially if there are

issues with credit repair or disputes on credit reports to

deal with. For a self-employed person, showing reliable

income for two years is a very good way to make conditions

as favorable as possible to get approved for an FHA

mortgage.

That means solid record-keeping, an aggressive approach to

finding (and keeping) steady work, and paying strict

attention to your taxes. Remember that unlike those with

traditional careers, there’s an additional layer of

scrutiny to the ebb and flow of steady income. If you went

a long period between contracts, or if 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.

Is it more difficult for self-employed people to get an FHA

mortgage? Yes. Is it impossible? Absolutely not, but you

need to plan for extra scrutiny to your personal bottom

line, keep good records, and be able to show your loan

officer that you are indeed a good risk.