There has been a forum discussion where a poster has asked if he can qualify for an FHA-insured loan as he is self employed. The loan officer, he talked to, said he would not qualify for the FHA loan unless he does a Statement of Income and shows considerable amount of money in the bank. Alternatively, he can also have a co-signer to qualify for the loan. The poster currently lives in a 3-family home and wishes to use the rental income to qualify for the new loan. His questions are:
1.Can he qualify for a FHA loan even though he is self-employed?
2.Can he use the rental income to qualify for the mortgage?
3.Does he really need to have a co-signer?
Self-employment does not disqualify the poster for an FHA-insured mortgage. He does not need to have a permanent job to get approved for the loan. The poster has a credit score of 720. So, in terms of credit he does qualify. But he needs to show that he has been self-employed for at least the past 2 years and has a stable income to afford the mortgage payments.
What are FHA guidelines regarding self-employed borrowers?
As per FHA rules, a borrower is considered to be self-employed if he owns 25% or more of a business. To qualify, he needs to provide the following documents:
1.Individual tax returns, including all applicable schedules, for the recent 2 years.
2.Federal business income tax returns, with required schedules, for last 2 years.
3.A year to date profit and loss statement and balance sheet.
Should the new home be used as principal residence?
The poster has mentioned that he currently lives in a 3-family home, which he also rents out. But FHA loans are allowed only on primary residences. Thus, if he wants to buy a new home with an FHA loan, he needs to vacate the current multi-family home and occupy the new one as his main residence. In that case, he has to provide the underwriter with a letter of explanation.
Can rental income be used to qualify for the loan?
The poster can use it as his income to qualify for the mortgage. However, there are certain guidelines regarding the use of rental income for qualifying purpose. In case he’s vacating the current principal residence and renting it out in order to occupy the new primary residence, he can use the rental income from his first home under the conditions given below:
1.Relocation due to employment: If he’s relocating for the purpose of employment, the rental income could be used for the calculation of his total income. In that case, he will have to provide the lender with a properly executed lease of a minimum of 1 year's duration, proof of a security deposit.
2.Enough equity in the property: Even if he’s vacating property for reasons other than employment, he can still use the rental income from that property to qualify. However, there has to be enough equity in the house and the loan-to-value (LTV) ratio on the property should be 75% or less. To determine the LTV, either an appraisal (not more than 6 months old) of the property is used or a comparison between the outstanding balance and the original sales price of the property is done.
The current home is a 3-family unit and the poster is occupying one of the units as his principal residence.
- He needs to show tax returns that give a history of rental income from the 2 units that he rents out.
- If he wants to use the rental income from the unit that he’s vacating, he needs to provide the underwriter with the copy of the cancelled check for 1 month’s rent and for 1 month’s security deposit, as well as a lease signed by him and the new tenant.
Is a co-signer required to qualify for the loan?
If the poster’s income (inclusive of the rental income) is enough to qualify for the loan, he doesn’t need a co-signer. The FHA loan co-signer doesn’t have to occupy the property. He can have his own property and still co-sign on the mortgage. But he’ll be equally responsible for the loan payments and if the poster defaults on the loan, the lender will come after the co-signer.
To view more discussions on this topic, you can refer to the following page:
http://www.mortgagefit.com/loantalk/fha-selfemployed-cosigner.html#139771 .