How to Find an FHA Mortgage If You're Self Employed
FHA (Federal Housing Authority) mortgages are loans that are sanctioned and protected by the government's Housing and Urban Development Administration. These protections are afforded to the lenders that make FHA loans, not the borrowers. In the event of default or foreclosure, the government covers the losses incurred. If you are self-employed, it can be more challenging to obtain an FHA loan--self-employed borrowers are considered a higher risk for lenders.
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Things You'll Need
- Business and personal bank statements (24 months)
- Business tax returns
- Business payroll checks
Instructions
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Pull a recent copy of your credit report. See Resources for a free copy. If you are self-employed, you already have a small mountain to climb in order to get an FHA loan. You'll want to make sure your credit won't disqualify you for a loan. Look for negative information--like charge-offs, delinquencies, judgments and liens--and attempt to clear it all prior to applying.
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Find a lender who reviews applicants who are self-employed. See Resources for a lender list. It is imperative that you do not begin a loan process with a lender only to find out later that they do not lend to self-employed borrowers.
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Review your business documents carefully. The main reason a self-employed borrower is denied an FHA mortgage is insufficient evidence of business cash flow, consistency and stability. Make sure your business is growing year to year, that your cash flow is evident in your bank statements and that you are expanding.
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Do a rough calculation for income. Most lenders use a debt-to-income ratio (DIR) to determine an applicant's ability to repay an FHA loan. Add up all deposits into your bank statements for twelve months, then divide by twelve. This is a rough gross monthly income. Divide all monthly expenses (personal, not business) by this amount. A good DIR is less than 45 percent.
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Make sure your loan-to-value (LTV) will be below 95 percent. Most FHA lenders will not lend to self-employed borrowers with an LTV greater than 90 percent, but a case can be made for 95 percent. Divide your mortgage balance (or proposed mortgage balance) by the value of the home to get your LTV. If you are purchasing a new home, subtract your down payment from the appraised value to get your mortgage balance.
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Be prepared to show more than two years of business records. Some lenders require only two years, but ask for more later if problems arise with your current returns. Speak with your accountant prior to applying and get records back at least four years.
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Tips & Warnings
If you have only been in business for a year, you'll likely be ineligible for an FHA mortgage.
