Are copies of tax returns required for an FHA mortgage for a borrower with self-employment or commission income?

SELF EMPLOYED MORTGAGE LENDERS QUESTIONS AND ANSWERSCategory: FHA QuestionsAre copies of tax returns required for an FHA mortgage for a borrower with self-employment or commission income?
Thomas Martin Staff asked 5 years ago

For self-employed FHA mortgage applicant, the lender must obtain complete individual federal income tax returns for the most recent 2 years, including all schedules. The FHA mortgage applicants business tax returns for the most recent 2 years must also be obtained unless the following criteria are met:

• individual federal income tax returns show increasing Self-Employment Income over the past 2 years;
• funds to close are not coming from business accounts; and
• the mortgage to be insured is not a cash-out refinance.A year-to-date Profit and Loss (P&L) statement and balance sheet must be obtained if more than a calendar quarter has elapsed since date of most recent calendar or fiscal year-end tax return was filed by the FHA mortgage applicant. A balance sheet is not required for FHA mortgage applicant self-employed borrowers filing Schedule C income. If income used to qualify the borrower exceeds the 2 year average of tax returns, an audited P&L or signed quarterly tax return must be obtained from the IRS.For Commission Income less than or equal to 25 percent of the borrower’s total earnings, the FHA mortgage lender must use traditional or alternative employment documentation.  For Commission Income greater than 25 percent of the borrower’s total earnings, the FHA mortgage lender must obtain signed tax returns, including all applicable schedules, for the last 2 years.For both Self-Employment and Commission Income, in lieu of signed individual or business tax returns from the borrower, the FHA mortgage lender may obtain a signed IRS Form 4506, Request for Copy of Tax Return, IRS Form 4506-T, Request for Transcript of Tax Return, or IRS Form 8821, Tax Information Authorization, and tax transcripts directly from the IRS.
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