Does anyone have any advice about qualifying for a FHA loan with self employment income?

Asked by Terry, Denver, CO Sun Aug 23, 2009

I live in Colorado and have been working in the same field for ten years. Last year I had some 1099 income but I was also employed full time at a agency doing the same type of work. I left that company at the end of the year and now all my income is 1099 income. I was recently turned down for a FHA loan because they said they would not allow the W2 income from last year to qualify me for a loan and they said they would not consider the income I am making from an agency now because I have only been there 10 months. Again, all the work I do with various agencies is in the same field and my income has doubled since last year. Though the underwriter verified my current income, they still turned me down. My credit score is 650 and all i owe is a car loan. It seems crazy that they would not consider all my income and also they said that after I file my taxes for 2009 they will average my income from 2009 and the 1099 income form 2008, after business expenses. Can anyone help?

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Michael Hump…, , Winchester, VA
Tue Aug 25, 2009
You are pretty much stuck. What they will take is two years tax returns and they will average the income or if the most recent year is lwer they will take that. It is not easy for the self employeed to get a loan that is for sure.
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, ,
Mon Aug 24, 2009
FHA will allow you to average out the last 3 years of income after expense PLUS a year to date profit and loss statement. The P&L has to be audited by a CPA (which could be costly). The income from 2009 cannot be too much more than last year. In other words, you can't go from $10,000 in 2008 to $30,000 in 2009 even if you actually made the money (there's a difference between getting a CPA to show more income and the IRS catching wind of it). So, you'll be using 2007, 2008, YTD 2009. The agency income may also be used as income if it was in the same line of work.

The agency income cannot be used if the lender thinks that you were only doing that job for 10 months and went into business for yourself for the first time ever in your life. I'm sure you were a CONTRACTED employee receiving W2 income (no benefits) and you were using that company to help propel your business into 2009.

You weren't turned down by FHA. You were turned down by a lender's processor who may not know how to think outside the box. Go to a broker in your area and ask if you can speak to the account executive for their most aggressive FHA lender. If they can't help you, they will tell you what to do to qualify. Sorry, I'm not licensed in your state. Your score, by the way, is fine. Just stay above 620. FHA is going to be the best way to go for any self employed person right now unless their score is above 760 and they are putting down at least 5%.
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John Keene, Agent, Denver, CO
Mon Aug 24, 2009

If anyone can help, it's Mike Savell at Chase. He's a top notch lender and knows all the ins and outs of FHA loans. Give him a call at 303-625-3123 or email him at

Best of luck,

John Keene
Keller Williams
0 votes
Brian Burke, Agent, Highlands Ranch, CO
Mon Aug 24, 2009
Call Shawn at 720-988-5404.
He is the Best Lender I know and he can make it happen if it can happen.
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Grace Hanamo…, Agent, Cupertino, CA
Sun Aug 23, 2009
Hello Terry and thanks for your question.

Actually, what you are experiencing is very common for the majority of Realtors, Business Owners, Car Salespeople, Marketing Representatives, Consultants, and anyone who receives income reported on 1099s.

Basically, there is no way around the rules promulgated by the Federal Housing Administration or FHA. if the bank providing you with the loan wants to sell the loan or receive a guarantee on the loan from the FHA, it must adhere to the rules, and, presently, the rules require all of us who receive 1099 income to be able to "document" that income via tax returns filed for the past two years, or income averaged returns for two years. Things get a tad bit easier when your credit score is higher (720 and above) and qualifies for a conventional loan or you have 20 percent or more to put down as a downpayment. Otherwise, a loan to a newly minted business owner or 1099 payer is considered risky, so the requirement that there be at least a year or more of 1099 payments has been instituted.

While you are waiting to qualify for a loan, I might also suggest working on your credit score. While a FICO mid score of 650 qualifies you for an FHA loan, it may also be worth your time and effort to work with your mortgage broker to increase your FICO score now to better your chances of a loan and a reduced mortgage rate.

Good luck and I'm sorry I could not provide you with any better news at this time.

Grace Morioka, SRES, e-Pro
Area Pro Realty
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