I field a great number of FHA Financing requests from Orlando, Florida area self-employed borrowers. Often, FHA home loan approval presents significant challenges for Orlando self-employed borrowers because of their typically low Adjusted Gross Income (AGI) totals post-deductions.
What Orlando Self-Employed Borrowers Face Today
No matter how you cut it, FHA loans require tax returns from the past 2 years for self-employed borrowers. If you’ve taken deductions that lower your AGI for each of the past two years to dollar amounts that can’t support your proposed mortgage or refinance, then you’re facing a challenge.
No More Stated Income Home Loans for Orlando Self-Employed Borrowers
Before 2008, stated income mortgages made it possible for Orlando self-employed borrowers to qualify for an FHA home loan. As we know, these loans are no longer available because abuse of these no-doc loans became rampant.  On average, lenders feel that self-employed borrowers are 25 percent more likely to default on their mortgages than non-ownership W-2 employees. The abuse that took place with Orlando stated income mortgages proved them right… and then some.
Orlando Self-Employed FHA Mortgage Requirements – An Overview
Today, FHA mortgage underwriters require that Orlando self-employed borrowers submit 2 years of tax returns to document their income. Though it’s likely that you have these documents available, this requirement becomes a challenge if your AGI – your actual taxable income – is too low to support the loan you need to buy your Orlando home.
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 Orlando 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 adjusted gross 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 – Orlando area self-employed business people deduct things from their taxes that regular W-2 employed folks cannot.
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!)
Allow me to provide this 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 Orlando business owners write off a good number of business expenses – bringing their taxable income down to an amount that may not support a home loan. Â
But I have money in the bank that shows I’m good for my Orlando mortgage. Can’t I just show the lender my bank statements? You can, but it won’t do you any good. It’s an IRS paperwork or nothing world. That’s the harsh reality.
To Right the Ship of Tax Deduction… Consider Increasing Your Reported Self-Employed Income
If the tax deduction blues have got you down – you may have to consider increasing your adjusted gross income amount. What’s that you say? No Way? Well… before you go to far in that direction, read on…
A good number of the deductions you write off can actually 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 work things out for every self-employed Orlando FHA home loan applicant, it’s advisable that you take a look at these “add ins” now so that you can properly plan ahead.
Here are a few 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
Note: Since these expenses may be added back, you might consider maximizing them on your future taxes if you plan to buy an Orlando home using an FHA mortgage.
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 Orlando FHA Mortgage Borrowers
One last thing to consider as an Orlando 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 Orlando FHA home loan approved.
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