HUD Self-Employment Guidelines On FHA Home Loans

This ARTICLE Is About HUD Self-Employment Guidelines On FHA Home Loans 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.

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.

All lenders need to have their borrowers meet the minimum HUD Employment Guidelines when qualifying borrowers for FHA loans.

• However, each lender can have higher standards when it comes to income and employment
• The additional higher lending standards are called lender overlays
• Lender overlays are lending guidelines that are set by individual mortgage lenders that are above and beyond the minimum HUD Agency Mortgage Guidelines
• There are lenders like Gustan Cho Associates Mortgage Group that has no lender overlays
• Gustan Cho Associates just goes off the minimum HUD Agency Mortgage Guidelines

Gustan Cho Associates has zero lender overlays on government and conventional loans. So when it comes to employment and income, we just go off the minimum HUD Employment Guidelines.

Importance Of Income And Employment When Qualifying For A Mortgage 

Income and employment are one of the most important factors when qualifying a borrower.

• The longer a borrower was with a particular employer without changing jobs, the safer the lender feels
• For example, lenders like to see a borrower who has been at the same job for the past ten years than a borrower who has hopped multiple jobs in the past two years
• Therefore, many lenders will require borrowers to have been on the same job for the past two years
• This is not a HUD 4000.1 FHA Guidelines but rather a lender overlay by the lender
• HUD Employment Guidelines are more lenient which we will cover in this article
• Gaps in employment in the past two years is allowed
• However, lenders may not allow this due to their lender overlays
• If you are told that you do not qualify for an FHA loan due to having multiple jobs in the past two years or having employment gaps in the past two years, look for a lender like Gustan Cho Associates that has no lender overlays

HUD Employment Guidelines Versus Lender Overlays On FHA Loans

Not all mortgage companies have the same employment in the past two years of mortgage guidelines on FHA loans.

• Many lenders will require borrowers to have the same employer for the past two years
• This requirement is not HUD Guidelines
• It is the individual mortgage lender’s own requirement
• Borrowers applying for an FHA loan should research the basic HUD Guidelines before applying for an FHA loan
• All lenders need to meet the mandatory minimum HUD Guidelines
• However, lenders can have lending requirements that are above and beyond the minimum HUD Guidelines
• These higher lending requirements by the lender is called lender overlays
• Gustan Cho Associates Mortgage Group is one of the very few national lenders that do not have any lender overlays on government and conventional loans

Gustan Cho Associates will just go off the minimum HUD Guidelines and not require any other overlay beside the agency guidelines.

HUD Employment Guidelines On 2-Year Employment History

One of the common questions by borrowers is do you need to be on the same job for the past two years?

• The answer is NO
• Gaps in employment and multiple employment in the past two years are allowed when qualifying for FHA loans
• Many borrowers are told they need two years of employment history with the same job
• This is not correct
• A lender may require no employment gaps and the same employment in the same job for the past two years as part of their lender overlays
• Two years of employment history means an overall two years of employment history needs to be stated on the mortgage application
• Say a borrower was employed with the same employer for the past one year
• However, the borrower was unemployed for ten years prior to the current job

The borrower will need an additional one-year employment history prior to their employment gap. That completes the two-year employment history.

HUD Employment Guidelines On Employment Gaps

Per the FHA handbook 4000.1, there are specific rules with gaps in employment to qualify for FHA loans.

• Borrowers can have a gap in employment in the past two years prior to applying for a mortgage
• If the borrower was unemployed for six months or less and gets a new job, the borrower can qualify for an FHA loan with the new job
• The new wage of the new job and stated on the employment offer letter is used for qualified income
• If the borrower has been unemployed for longer than six or more months and gets a new job, the borrower needs to be seasoned on the new job for at least six months
• The borrower can be unemployed for a long time frame

However, two-year employment history is required. Changing jobs in the past two years is allowed and does not have to be in the same field.

Going From 1099 Or Self-Employed To W-2 Wage Earner And Vice Versa

Self-employed borrowers need two years of full time self-employment income tax returns to qualify for an FHA loan.

• Full-time self-employed wage earners who go to W-2 wage earner jobs can qualify for a mortgage with no seasoning requirements
• An offer-employment letter and 30 days of paycheck stubs by the employer is required
• However, if a W-2 wage earner goes from W-2 wager earner status to self-employed income status need to be in their self-employed wage earner status for at least two years
• W-2 wage earner going to 1099 wage earner status need a two year seasoning requirement as a 1099 wage earner
• There is no seasoning requirement for 1099 wage earners going to a W-2 wage earner status

Full time students can use their full time education as equivalent to work experience and do not need two-years of employment history if they get a job as a W-2 wage earner after graduation and/or leaving school.

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.