The Federal Housing Administration, FHA, insures mortgages for approximately one-third of the country's home owners. As an agency within the Department of Housing and Urban Development, FHA guidelines require full documentation of borrower income to qualify for a government-insured loan. FHA-approved lenders determine eligibility of borrowers, co-borrowers and co-signers by reviewing their income through tax returns or tax transcripts covering the past two years. Borrowers that have not filed their income taxes do not qualify for FHA insurance.
Salaried, wage-earning, self-employed and commissioned borrowers qualify for FHA insurance if they can demonstrate stable and verifiable employment and income. Tax returns are the main vehicle for determining the borrower's income. Borrowers receiving retirement or Social Security benefits may also need to demonstrate that income using federal tax returns for the past two years. Filing income taxes is necessary for establishing income documentation for a loan, as the adjusted gross income and any related tax schedules are the basis for establishing earning trends, and ultimately the borrower's ability to repay the debt.
IRS Form 1040
FHA's underwriting process involves a review of the individual tax return, IRS Form 1040, for all persons obligated on the loan. The adjusted gross income shown on the 1040 is increased or decreased by the underwriter based on analysis of the individual tax return and any related schedules. Particular items analyzed include: wages, salaries and tips; Schedule C business profit and loss; rents, royalties and partnerships on Schedule E; capital gains and losses on Schedule D; interest and dividend income on Schedule B; farm income or loss on Schedule F; IRA distributions, pensions, annuities and Social Security benefits; and employee business expenses. Underwriting may add back or increase one's adjusted gross income calculation in the presence of IRA retirement deductions; penalties on early withdrawal of savings; health insurance deductions; and alimony payments.
Borrowers whose income includes at least 25 percent commission-based income must provide signed tax returns for the previous two years and their most recent pay stub to qualify using the commission income. They may be salaried or self employed. Self-employed borrowers must provide signed and dated individual tax returns, complete with applicable tax schedules for the past two years. Corporations, "S" corporations, or partnerships provide signed copies of federal business income tax returns for the past two years, with tax schedules.
A computer print out of tax return information obtained directly from the IRS, known as a tax transcript, may substitute for a tax return, as it shows the line items on the originally-filed return, necessary for underwriting the loan, and the cost of the document may be passed along to the borrower. Borrowers employed by a family-owned business must prove they are not an owner of the business, using signed personal tax returns or a signed copy of the corporate tax return showing ownership percentage.
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