FHA and the Self-employed - Part III

Self-employed borrowers come in different shades and sizes. If you are applying for a mortgage loan for your personal use, you need a better understanding of what the lender is concerned about and why. This post will guide you.

The legal structure of a business determines the way income or loss is reported to the IRS, the taxes that are paid, the ability of the business to accumulate capital, and the extent of the owner's liability. There are five principal business structures: Sole Proprietorships, Partnerships, Limited Liability Corporations, S Corporations, and Corporations.

Knowledge of the structure of a self-employed borrower's business will assist the lender in evaluating the stability of the business and the degree of the borrower's involvement. In analyzing a self-employed borrower's personal income, the lender should focus on earnings trends and the actual sources of the income, not just on the total amount of the income. The lender must confirm the stability and likelihood of continuance for each.

Federal income tax returns (both individual returns and business returns) for the past two years, with all applicable schedules attached. Instead of obtaining a copy of a self-employed borrower's applicable tax returns directly from the borrower, the lender may use IRS-issued transcripts of the borrower's individual and business federal income tax returns that were filed with the IRS for the most recent two years, provided the information is complete and legible and the transcripts include the information from all of the applicable schedules.

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