FHA Loans and Your Tax Records

July 6, 2015

Many FHA loan applicants want to know the answer to the question we were asked recently. “Is an FHA requirement for a home buyer to have two years of taxes?”

Tax records can be a very important part of the FHA loan process. All FHA borrowers should be prepared to include tax information with the mortgage loan application. The actual requirement can vary depending on lender standards, state law, and whether the borrower is self employed or not. Your tax records could make all the difference when it comes to verifying your income as the owner of a small business, someone who earns commissions, or a self-employed freelancer.

FHA loan rules found in HUD 4155.1 Chapter Four Section D addresses these issues. The rules for self-employed FHA loan applicants, or those who own a family business include the following:

“Self employed borrowers must provide

• signed, dated individual tax returns, with all applicable tax schedules for the most recent two years.
• for a corporation, “S” corporation, or partnership, signed copies of Federal business income tax returns for the last two years, with all applicable tax schedules
• a year-to-date profit and loss (P&L) statement and balance sheet, and
• a business credit report for corporations and “S” corporations.”

Any FHA loan applicant employed by a business owned by a family member should know the FHA loan rule which applies in such cases:

“In addition to normal employment verification, a borrower employed by a family-owned business is required to provide evidence that he/she is not an owner of the business, which may include

• copies of signed personal tax returns, or
• a signed copy of the corporate tax return showing ownership percentage.”

And what about FHA loan rules for borrowers who bring home income from commissions? HUD 4155.1 states:

“Commission income must be averaged over the previous two years. To qualify with commission income, the borrower must provide

• copies of signed tax returns for the last two years, and
• the most recent pay stub.

Commission income showing a decrease from one year to the next requires significant compensating factors before a borrower can be approved for the loan.”

It’s a good idea to discuss your financial picture with the loan officer to see if you need additional supporting documentation if you are self-employed, a commission earner, or work as part of a family business.