FHA Home Loans and Small Businesses: Mortgage Rates Affordable with an FHA Loan

By Dean Schermerhorn
Calculators for Mortgages Columnist

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Are you a small business owner?  As you shop for the best mortgage rates and use your mortgage calculator, you might find that an FHA loan makes sense.  Keep reading below for details.

FHA Loans Offer Great Home Loan Rates

The Federal Housing Administration provides mortgage insurance to lenders throughout the United States. FHA insures mortgages on single and multifamily homes, including manufactured homes. This insurance protects lenders against losses when borrowers default on mortgages.

You can benefit from these advantages of an FHA-insured loan:

• FHA's credit underwriting guidelines are more flexible and are not score-driven.
• Down payment requirements are as low as 3.5%.
• FHA does not have risk-based pricing, so FHA loans can cost less than conventional mortgages.

You have to pay both an upfront mortgage insurance insurance premium, which can be financed, and an annual premium, which is divided by twelve and added to your monthly payment. FHA loans cost the taxpayer nothing; FHA operates entirely from the mortgage insurance paid for by borrowers.

FHA has insured more than 34 million properties since it was created as part of the New Deal, in 1934. Now part of the Department of Housing and Urban Development, FHA has a portfolio with 4.8 million insured single family mortgages and 13,000 insured multifamily projects.

Small Business Ownership No Obstacle to FHA Mortgage Approval

You might have heard that someone who is self-employed is disqualified from receiving an FHA loan. While you need to have been in business at least two years, lenders do indeed have programs and guidance to help.

As evidence of a private contractor's or small business owner's creditworthiness, FHA needs to see:

• Financial statements--year-to-date profit and loss (P & L) and balance sheet.
• Signed & dated individual tax returns (with all schedules - including W-2 forms and 1099 forms) for the most recent 2 year period is required.
• Signed copies of business income tax returns for the most recent 2 years (with all schedules) is also required if the business is a Corporation, an "S" Corporation, or a Partnership.

Your earnings must be averaged over the previous two years. The tax returns are analyzed and considered as well as the YTD income information. The financial strength of your business and the economic trends for that kind of business must be analyzed. Right now, a construction business might be considered risky, but health care or information technology would be considered strong fields. Tax returns that show stable or increasing income are acceptable. In general, declining earnings are considered unacceptable.

If your research and mortgage calculations have not yielded rates that seem attractive, an FHA loan might be your answer.

About the Author
Dean Schermerhorn, MA, owner of Concise Communications, lives in Reno, Nevada. He has written for banking, health-care and manufacturing businesses and articles on finance and business topics.

Date :2009-12-01