Mortgage for Self-Employed: New FHA Rules and Their Impact on Borrowers
The FHA has adjusted its rules on a mortgage for self-employed professionals. This article outlines the changes and provides information on mortgages for the self-employed.
The coronavirus and the resulting economic slowdown has created a variety of changes in the real estate industry. Overall, things are steady and relatively active; certainly not the doom-and-gloom that was feared by some. However, many organizations in the real estate sector, including government agencies that support lending activity, have had to make changes.
Recently, the Federal Housing Administration (FHA) has implemented new guidelines for self-employed borrowers. While the basic requirements are essentially left unchanged, there have been adjustments to how lenders verify information, especially information on self-employed borrowers.
Financing remains available, but the process is just a little more detailed.
FHA Adjusting Rules on Mortgages for Self-Employed Borrowers
1. Verifying Continuing Income
For self-employed borrowers, the lender will need to have a variety of information before they will be able to issue an FHA loan, but most important is verifying that your business is continuing to operate. In the past, this was more or less taken for granted, but with the COVID-19 crisis striking the country, and impacting millions of businesses across the country, the government wants to be especially diligent. They can no longer just assume a business is still going, they need confirmation.
To establish this, lenders can use various methods. First of all, you can bring evidence that you are currently working. Executed contracts, signed invoices, and any other documents that show continued business operations will be useful for this purpose.
The lender can also use current business receipts within 10 days of the payment. Generally this note will be created towards the end of the application process.
You can also get lender certification that the business is actually open and operating. With this verification technique, the lender will simply call or even visit the business to confirm that there is a business in current operation.
An even more convenient method, lenders can also use your business website to confirm operations. You business website may have information such as timely appointments for estimates or services that can be scheduled.
In many cases, a lender will use multiple options listed above. They may call your business, visit the website, and obtain receipts. In combination, this can essentially prove you are still operating a business.
2. Rental Income for Qualification
This next change to the guideline has to do with property owners and landlords who are using rental income to qualify for an FHA loan, which would be used to purchase a personal property. (Not another income property.) The economic slowdown in response to the coronavirus has create instability in the rental market, as many people who have been laid-off are now having trouble making their monthly rental payments. This has made mortgages for self-employed professionals more risky.
In response, the FHA has made changes to their qualification process. Most noticeably, they have reduced the amount of qualifying income associated with rental property to 25%. Basically, you can now only have a quarter of your income coming from rent checks. The FHA will also require six months of reserves, and the lender will need to verify that you have received two months of rental payments to use that income. So if you have two properties, one with a tenant who has made two years of payments, and another with a tenant who has made one month, you can only use income from the first.
Options for Self-Employed Borrowers and Landlords
These new guidelines do not, in any way, eliminate the use of FHA loans for self-employed borrowers, landlords, and other people who have unique forms of employment income. They have simply made it a little more complex, but certainly not difficult.
By implementing these guidelines, the FHA is simply making the process of verification on a mortgage for self-employed professionals more detailed and exhaustive. There are simply a few more steps to qualify, but the basic requirements are left relatively unchanged. (Except for some of the requirements for landlords.) Basically, potential borrowers who own businesses simply need to prove that their business exists; other than that, the guidelines remain relatively unchanged.
While an FHA loan for self-employed borrowers is still possible, we would encourage you to explore other options before making a final choice.
Conventional loans, a popular option for all sorts of borrowers, are still available for self-employed professionals and landlords. Like FHA loans, this form of financing has been adjusted to fit the current status of the marketplace, especially for business owners. If seeking a conventional loan for a self-employed borrower, you should bring a profit-and-loss statement, which can be audited or not. You will also likely need at least two months of business account statements to qualify.
Bank Statement Loans
When people don’t have traditional pay stubs, because of write-offs and other details, their tax documents do not accurately reflect their entire income. It can be harder, therefore to secure a loan for your home purchase. For this reason, many borrowers turn to bank statement loans.
With this option, you use statement information from your bank account to demonstrate how much income you receive, how much you have in savings, and how much you have in overall debt payments. In many ways, this can actually be a more effective technique for proving your income.
Our team is proud to work with self-employed borrowers. Small businesses are an important component of the national economy, providing millions of jobs and delivering the good and services we all need to live our lives. The self-employed owners who run these businesses should have access to loans that are convenient, affordable, and reliable.
Excellent Service for Self-Employed Mortgage Loans
We understand the challenges of getting a mortgage loan for self-employed borrowers, and we’ll put our experience and dedication to work for you, ensuring the loan you receive fits your budget and allows you to reach your goals!
Contact our staff today and increase your chances of loan approval with our common-sense approach to mortgage underwriting!