FHA vs Conventional Mortgages

A comparison with Pros and Cons

Conventional, FHA and VA loan programs require an applicant to prove the amount of the income he or she reports on their loan application for purpose of qualification by providing W-2s, tax returns, or both. Borrowers that seek to qualify with self-employment income will typically be required to provide a minimum of two income tax returns to document the amount of their income.  Applicants needing to utilize bonus or commission income may also be required to provide written proof of receipt of that income for two years or more.  Even if an applicant earns sufficient income to otherwise qualify for these loans, that borrower might not be able to provide the documentation necessary to fulfill the requirements on a conforming (prime) loan.

For these applicants a “no income verification” loan program or an “alternate” documentation program (e.g. using deposits to bank accounts to document income in lieu of tax returns) may be the only option for qualification. However, recent federal legislation has limited the ability of lenders to provide no income verification loans and stated income loans. Programs with alternate documentation requirements, that do not require production of tax returns, are still available.

These types of no income verification loans have higher loan-to-value ratio requirements than conforming loans and the best-priced non-conforming loan programs. This type of loan will also have a significantly higher rate and closing costs.

Not all lenders have the same documentation requirement for self-employed borrowers. Most mortgage lenders require a self-employed borrower to have been in business for at least two years. And the income must calculated with the average income from the two most recently filed tax returns. On conforming loans we can often obtain approval with a single tax return for a borrower that has been in business for as little as six months.

Refer to our Frequently Asked Questions about No-Income-Verification Loans for more information about this type of loan program.

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