The Mortgagee (lender) must obtain signed, completed federal income tax returns, including all schedules.
In lieu of signed individual or business tax returns from the Home Equity Conversion Mortgage (HECM) Borrower, the Mortgagee 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 Internal Revenue Service (IRS).
The Mortgagee must obtain a year-to-date profit and loss (P&L) statement and balance sheet if more than a calendar quarter has elapsed since date of most recent calendar or fiscal year-end tax return was filed by the Borrower. A balance sheet is not required for self-employed Borrowers filing Schedule C income.
If income used to calculate residual income exceeds the two-year average of tax returns, an audited P&L or signed quarterly tax return obtained from IRS is required.
The Mortgagee must obtain a business credit report for all corporations and “S” corporations.
The Mortgagee must analyze the Borrower’s tax returns to determine gross self-employment income.
The Mortgagee must calculate gross self-employment income by using the lesser of:
- the average gross self-employment income earned over the previous two years; or
- the average gross self-employment income earned over the previous one year.
Additional Requirement due to the COVID-19 National Emergency:
The following information, published in Mortgagee Letter (ML) 2020-24 and extended in MLs 2020-40, 2020-46, 2021-07, and 2021-16 is effective for FHA Case Numbers issued on or before September 30, 2021.
The Mortgagee must obtain one of the following to verify and confirm that the business is open and operating:
- evidence of current work (executed contracts or signed invoices that indicate the business is operating on the day the lender verifies self-employment);
- evidence of current business receipts within 10 days of the Note date (payment for services performed);
- lender certification that the business is open and operating (lender confirmed through a phone call or other means); or
- business website demonstrating activity supporting current business operations (timely appointments for estimates or service can be scheduled).
For additional information see:
- Mortgagee Letter 2016-10 and the attached revised HECM Financial Assessment and Property Charge Guide, Sections 3.25 and 3.26, and
- Mortgagee Letters 2021-16, 2021-07, 2020-46, 2020-40 and 2020-24: https://www.hud.gov/program_offices/administration/hudclips/letters/mortgagee