FHA Loans for Self-Employed Borrowers

Buying a home is a complicated process. And if you throw self-employment into the mix, it gets even more so. Fortunately, with the right documentation, self-employed borrowers are perfectly able to take out mortgages – including Federal Housing Administration (FHA) loans. 

What are FHA Home Loans?

FHA loans are government-insured mortgages designed for lower-income borrowers in order to provide more – and better – housing opportunities. FHA loans have more flexible qualifying requirements than many other types of home loans. 

How is Self-Employment Defined?

If you own 25% of a business – or more – the FHA considers you to be self-employed. And that puts you in a different borrowing category, where you’ll have to meet some extra requirements and provide additional documentation.

Requirements for Self-Employed FHA borrowers

If you’re self-employed and looking to take out an FHA home loan, these are the criteria that you’ll need to be able to meet and document: 

Self-employed for two years

Generally, you’ll have to prove ownership in your company – and that you’ve been in business for at least two years. You can do this by providing your business license and a letter from a CPA stating the length of time your business has been operating.

If you’ve been self-employed for less than two years but more than one, you’ll also need proof of previous employment in the same industry.

Proven and stable income

You’ll need to be able to verify your income for the last two years on paper. You’ll submit your personal tax returns for the period, as well as a profit and loss statement or balance sheet for your company. Depending on the structure of your business, you may need to provide two years’ worth of business tax returns as well.

Typically, whichever document shows the lowest income is the one that will be used. And your income must have been steady or increasing over the two-year period. If it dropped more than 20%, you’ll likely need to provide additional mitigating documentation.

Down payment of at least 3.5%

3.5% is the minimum down payment you’ll need to apply for an FHA home loan – but it’s always helpful to have more. Self-employed borrowers are among the riskiest from a lender’s perspective, so anything you can do to strengthen your application – like putting down a larger deposit – is advisable.  

Credit score of at least 500

Again, 500 is about the minimum credit score that you’ll be able to apply with. The higher your credit score, the better a candidate you are. If you’re considering applying for an FHA loan, it’s worth keeping an eye on your credit and doing what you can to strengthen it. You can learn more about credit scores and how to improve yours here.

It’s quite common that a business meets all requirements, but is unable to sufficiently document its compliance. That’s why it’s really important to keep thorough and accurate records if you’re self-employed and looking to take out a mortgage.

Helping You Find the Right Home Loan in San Diego

You should now be able to see that it’s quite achievable to get an FHA loan if you’re self-employed. There’s just a bit more paperwork involved – and that’s where UW Funding comes in. We can take a look at your specific situation – because every business is different – and let you know exactly what you need to apply for an FHA home loan. And we’ll do the paperwork for you too. Get in touch today to get the ball rolling on your San Diego FHA loan.