Navigating the world of FHA loans as a self-employed borrower has always required a careful understanding of income documentation. Recent changes to FHA guidelines have introduced updates that could impact how self-employed income is calculated, potentially making it easier for borrowers to qualify. Here’s a closer look at these changes and what they mean for Schedule C, 1120, and 1120S filers.

Understanding Schedule C Updates

Previously, the FHA guidelines did not explicitly allow the addition of “business use of home” expenses back to net income when calculating self-employed income from Schedule C. However, the updated guidelines now permit this adjustment, bringing FHA policy more in line with standard IRS practices.

When evaluating Schedule C income, the following deductions can now be added back to net income:

  • Depreciation
  • Depletion
  • Business use of home expenses
  • Amortization
  • Casualty losses

Additionally, borrowers who claim mileage deductions can add back a percentage of the mileage deduction, provided they wrote off actual miles rather than vehicle expenses.

These changes can provide a more accurate representation of a self-employed borrower’s income, potentially improving their chances of qualifying for an FHA loan.

Updates for 1120 and 1120S Filers

For those filing as a corporation (1120) or an S corporation (1120S), FHA guidelines have also been updated. Previously, only depreciation and depletion could be added back to income. The new rules now allow for additional adjustments, including:

  • Depreciation
  • Depletion
  • Amortization
  • Casualty losses

However, there’s an important distinction for 1120 (C Corporation) filers: only non-recurring casualty losses can be added back. This subtle but critical detail emphasizes the need for a thorough review of financial statements to ensure accurate income calculations.

Why These Changes Matter

While these updates may seem minor, they can make a significant difference for self-employed borrowers. By allowing for additional add-backs, the FHA is providing more flexibility in how income is calculated. This can mean the difference between qualifying for a loan or falling short of the necessary income requirements.

For lenders, understanding these changes is crucial to properly assess a borrower’s eligibility and avoid missed opportunities. A borrower’s income can look drastically different when these allowable add-backs are taken into account, highlighting the importance of staying informed about evolving guidelines.

Final Thoughts

As a self-employed borrower, understanding how your income is calculated under FHA guidelines is critical. These recent changes offer more opportunities for qualification but also underscore the importance of accurate documentation and expert guidance. If you’re navigating the FHA loan process, partnering with a knowledgeable mortgage professional can help ensure you’re maximizing your income potential and positioning yourself for success.

At North Star Mortgage Network, we specialize in helping self-employed borrowers find the right loan solutions. Visit us at www.nsmn.com to learn more about how these FHA changes could work in your favor.

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