HUD 4000.1 On Self Employment Income For FHA Home Loans

HUD 4000.1 On Self Employment Income For FHA Home Loans

HUD 4000.1 has rules that govern the procedures a participating FHA lender must use to verify the income of a self employed borrower or owner of a family business.

The fact that an FHA mortgage loan applicant is self-employed is not a barrier to loan approval, but there are different requirements for those who own a family business or who are considered self employed.

HUD 4000.1 has instructions for the lender in these cases, beginning with a definition of who is affected by these rules:

“Self-Employment Income refers to income generated by a business in which the Borrower has a 25 percent or greater ownership interest. There are four basic types of business structures. They include:

–sole proprietorships;
–corporations;
–limited liability or S corporations; and
–partnerships.”

How does a lender proceed when an FHA loan applicant meets this basic criteria for being self employed? For starters, two years of self-employment is generally required as a minimum. However, exceptions can be made in limited circumstances:

“If the Borrower has been self-employed between one and two years, the Mortgagee may only consider the income as Effective Income if the Borrower was previously employed in the same line of work in which the Borrower is self- employed or in a related occupation for at least two years.”

The stability of the borrower’s income in these circumstances is very important. HUD 4000.1 says, “Income obtained from businesses with annual earnings that are stable or increasing is acceptable. If the income from businesses shows a greater than 20 percent decline in Effective Income over the analysis period, the Mortgagee must downgrade and manually underwrite.”

A self-employed borrower will need to furnish tax records, business plans, profit and loss statements and other additional documentation.

When it comes to calculating the self-employed borrower’s effective income, FHA loan rules instruct the lender to use the lesser of, “the average gross Self-Employment Income earned over the previous two years; or the average gross Self-Employment Income earned over the previous one year.”