Be prepared: Your loan officer will be much more thorough in examining your documentation

Be prepared: Your loan officer will be much more thorough in examining your documentation

Proof of steady income for the self-employed can be more complicated, but you can still qualify if you provide the right documentation.

The FHA does not require professionally prepared business reports. However, having a pro look at your income and profit and loss (P/L) statement is money well spent. If you use a certified public accountant (CPA), the CPA can strengthen your application by providing a letter stating he has first-hand knowledge that you have been employed for two years in the same or a similar enterprise.

Make sure you address any outstanding credit issues, disputes with vendors or tax problems before submitting an FHA loan application. Bottom line for the self-employed: Make your paperwork rock-solid. As a small-business person or independent contractor, you will need to show not only that you have had steady employment, but also that you have sufficient net income after expenses. Submissions for the self-employed include:

  • Business income statements for the previous two years.
  • Profit and loss statements for the past two years.
  • IRS Form 1040 including Schedule C (business income and loss) and, if they apply, Schedules B (interest and dividend income), D (capital gain and loss), E (rents, royalties, partnerships), F (farm income and loss).
  • If you are incorporated, submit IRS Form 1120.
  • If you use a CPA, ask for a verification of employment letter stating that the CPA has first-hand knowledge that you’ve been employed for two years in the same or a similar enterprise.

Other Income

There are many miscellaneous sources of income. Mainly, the documentation is the same – proof that you’re entitled to the income, proof that you’re receiving the income, and proof that the income will continue for at least three years.

Alimony or Child Support

If alimony or child support are part of your regular income, your lender wants to be sure the income’s source is consistent and verifiable. Submit documentation stating one party is legally obligated to pay the other party, such as a divorce decree, formal separation agreement or court order.

The lender wants to know how much of your income is based on alimony or child support. While standards vary from lender to lender, generally, if alimony or child support is less than or equal to 30 percent of your income, then you must submit documents that show:

  • A payday loans in Dyersburg TN minimum of three years’ commitment to continue payments.
  • A record of regular, on-time payments at least six months before the loan date, which can be shown through your bank statements or canceled checks.
  • Written evidence showing that the other party is obligated to pay.

If alimony or child support is more than 30 percent of your income, then you must submit documents that show:

  • A record of regular, on-time payments at least one year before the loan date, which can be shown through your bank statements or canceled checks.
  • A minimum of three years’ commitment to continue payments.

The FHA does not enforce guidelines on alimony and child support income – your lender does. Since policies can vary, contact your lender to learn its policies before you prepare and submit your alimony and child support documents.

Interest Income

The lender will average your interest income over the previous two years and assess the potential of your assets to continue to retain value and produce interest income. The lender can include interest income from investments if you supply your most recent statements from your bank or asset manager showing interest payments. You might also need signed tax returns from the previous two years or a tax transcript directly from the IRS.