Here are FHA Loan Rules For Self-Employed Borrowers

by Maria Del Carmen Sanchez

What do self-employed house hunters need to know about the home loan approval rules applicable to self-employment income?

If you are not sure how your FHA lender will qualify you based on your income, keep reading–there are some important facts you will need to know before you fill out FHA loan paperwork.

The first thing to know is how the FHA defines “self-employment” and why. The lender is required to ensure your income is stable and reliable and that you will continue to earn that income to help pay for your mortgage.

The FHA has different qualification rules for self-employment income; you are basically required to show two years of self-employed income in a similar line of work to your salary, commission, or hourly income when you were not self-employed. If your self-employed income shows a decline of over 20% over the “analysis period” (however long a timeline the lender looks at, typically two years) you may not qualify for the loan.

The lender wants to see that your income is stable or increasing, not dwindling. However, new FHA loan program guidelines published in July 2022 now give the lender added flexibility when examining income if the applicant has had a negative economic event related to COVID-19.

Your lender may be able to give you some flexibility in the income qualifications if your circumstances qualify. You will need to speak to an FHA lender to learn more about how this may apply in your case.

The new guidelines instruct the lender, in part, as follows: “The Mortgagee may consider self-employment income if the Borrower has an aggregate self-employment history before and after the COVID-19 Related Economic Event totaling two years.” That’s a new section of HUD 4000.

1 dedicated to this issue, and it instructs the lender, “If the Borrower has an aggregate self-employment history before and after the COVID-19 Related Economic Event totaling between one and two years,” the participating FHA lender is only allowed to consider such income. “…if the Borrower was previously employed in the same line of work in which the Borrower is self-employed or in a related occupation for at least two years.”

This can serve to give you a better idea of what it might take to qualify for an FHA purchase loan or an FHA refinance loan as a self-employed applicant, but what does the FHA define as being “self-employed”? It’s not just for those who own their own company outright, as we learn from the FHA official site:

“Self-Employment Income refers to income generated by a business in which the Borrower has a 25 percent or greater ownership interest.”

HUD 4000.1 now reminds lenders there are (four) basic types of legal business entities an FHA borrower might be part of:

• Sole proprietorships; proprietorships;

• Corporations;

• Limited liability or “S” corporations;

• Partnerships. Owning 25% or more of any of the above could require the lender to process your loan application as a self-employed borrower.

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