Recent requests for FHA Financing for self-employed borrowers have come through our Winter Haven office. It’s an issue that is causing a good bit of frustration for some self-employed folks as they attempt to secure home loan financing.
What’s at issue here, of course, is whether the deductions taken by the self-employed borrower have brought their reported income level down to a point that fails to support the monthly payments of the loan for which they are applying.
No More Stated Income Home Loans for the Self-Employed
Before 2008, the “no doc loan” or “stated income loan” made it possible for self-employed Winter Haven, Florida borrowers to get qualified for an FHA home loan. However, abuse of these types of loans ran rampant – and led to (albeit not solely) to mortgage and home loan situation we find ourselves in today.
As such, FHA mortgage underwriters now require that self-employed borrowers provide 2 years of tax returns to document their income. As previously mentioned, this can be a bit problematic if your taxable income, as stated on your tax documentation, is too low to support the loan you wish to take out.
The following points outline a few steps you, as a self-employed individual, can take in terms of mapping out your future tax situation in order to maximize your ability to qualify for an FHA home loan.
When you apply for your Winter Haven FHA home loan, you will have to provide your tax returns under one of the following situations (Note: this list is meant for illustrative purposes and is not exhaustive):
- You are a self-employed sole proprietor or business owner (includes LLC’s, S Corps, partnerships, etc…)
- More than 25% of your income is commission-based
- You own rental property from which you derive income
- You receive income from dividends, royalties or capital gains that you are using as income to qualify for a loan
- You have income from partnerships or corporations (where you are less than 25% owner) that you want to use to qualify for a loan
- You receive 1099 income that you plan to use to qualify
Your FHA underwriter will take a look at your tax returns in order to verify your income. Normally, she or he will average your net income from the last 2 years to calculate your qualifying income. (Here’s where your eyebrows may begin to rise a bit…)
See, as part of the American Dream – self-employed business folks are allowed to deduct things from their taxes that regular W-2 employed folks are not. This is great when tax time rolls around! (Yeah!) However, too may deductions can cause a real “hitch in your proverbial giddy up” in terms of getting your FHA home loan application approved.(Boo!)
Here is an Example…
If you apply for an FHA mortgage in 2009, the underwriter will average together your 2007 and 2008 tax return income.
One common problem here is that many business owners have many business expenses that they write-off bringing their taxable income down to a very small amount that will not qualify them for a home loan.
The underwriter will only count your net income after most of your business expenses. As most business owners write-off a good amount of their income, you can see how they might be finding it tough to qualify for a home loan today.
To Right the Ship of Tax Deduction… Try Bolstering Your Reported Self-Employed Income
Tax deduction blues got you down when you’re trying to qualify for your Winter Haven FHA Home loan? Well, consider this. A good number of the deductions you write off an be added back into your bottom line in order to beef up the total earned income number your underwriter takes into consideration.
While these may not add in enough income to support every self-employed FHA home loan application, it’s advisable that you take a look at these “add ins” now so that you can properly plan ahead.
Here some of the most common deductions you may add back into your net income total:
- business use of home (such as a home office)
- business vehicle mileage
- depreciation
- depletion (this is not a common write-off and most will not have this)
- casualty losses dues to theft, fire or natural disasters
- losses carried over from prior years (since the loss was in a prior year, it will not be counted against your qualifying income)
- one-time extraordinary expenses
Since these expenses may be added back, you might consider maximizing them on your future taxes if you plan to buy a home using an FHA home loan.
As with all of my comments and insights found on this site, please make sure that you talk to your CPA or tax professional and explain to them that you’re trying to qualify for an FHA mortgage. They’ll be able to help you maximize your net income and hopefully, with some luck, you’ll meet the required income level for FHA home loan qualification!
Bonus Tip for Self-Employed FHA Mortgage Borrowers
One last thing to consider as a self-employed FHA mortgage applicant is the fact that you may use a co-borrower (even a non-occupying co-borrower) to help you qualify. If you find that adding in the allowable deductions listed above fails to get you to that “magic number,” consider recruiting co-borrowers who can show the required income to help you get your FHA home loan approved.
Apply Online for Your FHA Mortgage Today
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Kevin Sandridge
Florida Mortgage Pro
Signature Home Funding
410 Laurel Cove Way
Winter Haven, FL, 33884 |
Mobile: 863-604-3019
Fax: 888-496-0265
Email: kevin.s@sigfunding.com
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