A mortgage for self-employed borrowers uses the same loan programs as any other mortgage, but lenders qualify you on the income your tax returns show, not your gross sales. Fannie Mae and FHA both treat you as self-employed if you own 25% or more of a business, and both generally want a two-year history, documented with personal (and often business) federal tax returns. Some shorter histories and one-year return options exist, and a written cash flow analysis decides the income you qualify with.
I'm Taylor Ring, a Mortgage Loan Officer with Fairway Independent Mortgage Corporation (The Wood Group) in Belton. Self-employed buyers in Temple, Killeen, Waco, and Round Rock tend to ask me the same thing first: "Will my write-offs keep me from buying a house?" Sometimes they hurt, sometimes less than you'd think. Here's how the conventional (Fannie Mae) and FHA rules work so you can plan before you apply.
Self-employed and thinking about buying? Get Pre-Approved or Book a Free Consultation.
Who Counts as Self-Employed for a Mortgage?
Both Fannie Mae and HUD draw the line at 25% ownership. If you own 25% or more of a business and use its income, underwriting treats you as self-employed. HUD lists four business structures: sole proprietorships, corporations, limited liability or "S" corporations, and partnerships.
That includes a lot of people who don't think of themselves as business owners, like a 1099 contractor filing a Schedule C.
Self-Employed Mortgage Requirements: Fannie Mae vs. FHA
| Requirement | Conventional (Fannie Mae) | FHA (HUD) |
|---|---|---|
| Ownership that makes you self-employed | 25% or more | 25% or more |
| Usual history | Two years | Two years |
| Shorter history | Possible if your most recent signed personal and business returns show 12 months from the current business, plus prior income at the same or higher level in the same field or a similar role | One to two years allowed only if you worked at least two years before in the same or a related line of work |
| Personal tax returns | Signed returns for the past two years with all schedules, or IRS transcripts; one year allowed if the business has existed five years and you've owned 25%+ for five straight years | Complete returns for the most recent two years with all schedules |
| Business tax returns | Required in some cases; can be waived if you use personal funds, have five years in the same business, and your personal returns show rising self-employment income | Required for two years unless your personal returns show rising self-employment income, funds to close aren't from business accounts, and it isn't a cash-out refinance |
| Year-to-date figures | Not stated as a general requirement in B3-3.5-01 | Year-to-date profit and loss statement and balance sheet if more than a calendar quarter has passed since your last tax year ended (no balance sheet for Schedule C filers) |
| How income is calculated | Written cash flow analysis (Form 1084 or an approved tool) | Lesser of the two-year average or the most recent one-year average |
| Declining income | Lender analyzes year-to-year trends in the business | A drop of more than 20% sends the loan to manual underwriting |
Sources: Fannie Mae Selling Guide B3-3.5-01 and HUD Handbook 4000.1, Self-Employment Income.
How Your Write-Offs Affect What You Qualify With
Underwriters start from the net income on your returns. For a sole proprietor, that's the net profit on Schedule C. So the deductions that lower your tax bill can also lower your qualifying income.
The good news: Fannie Mae's Cash Flow Analysis (Form 1084) adds some non-cash items back. On the Schedule C section of the form, the lender adds back:
- Depreciation
- Depletion
- Business use of home
- Amortization and casualty loss
It also subtracts non-deductible travel and meals, and adjusts for nonrecurring income or expenses.
Hypothetical example: A Schedule C contractor shows net profit of $60,000 two years ago and $72,000 in the most recent year, with $8,000 of depreciation in the most recent year. On a Form 1084 analysis, that $8,000 is added back to the cash flow figure. Under FHA's method, the lender would compare the two-year average ($66,000) with the most recent year ($72,000) and use the lesser, $66,000, or about $5,500 a month, before any adjustments from Appendix 2.0. Hypothetical numbers; your actual qualifying income depends on the full analysis of your returns.
That monthly figure is what goes into your debt-to-income ratio. See my debt-to-income ratio for a mortgage guide for how the ratio works.
When Income Drops
HUD says that if your business income shows a decline of more than 20% over the analysis period, the loan has to be downgraded and manually underwritten.
Hypothetical example: $80,000 two years ago, $60,000 last year. That's a 25% drop, over HUD's 20% line. It doesn't automatically mean no, but expect a closer review and more questions about why. Hypothetical numbers for illustration.
Fannie Mae's version is a trend analysis: the lender looks at year-to-year changes in gross income, expenses, and taxable income to judge whether the business is stable.
Partnerships, S Corps, and Corporations
If your business files its own return, there's an extra step. Fannie Mae notes that partnership or S corporation income on your personal return may not represent money actually paid to you. Form 1084 says that income can be used only if the lender documents that it was distributed to you, or that the business has enough liquidity to support the withdrawal. A regular (C) corporation's earnings can be used only when you own 100% of it.
Fannie Mae also requires a written analysis of the business itself when business returns aren't waived, often using its Comparative Income Analysis (Form 1088).
Using Business Money for Your Down Payment
You can, but it takes more paperwork. Fannie Mae says if you qualify with self-employment income and also use business assets for the down payment, closing costs, or reserves, the lender must do a business cash flow analysis to confirm the withdrawal won't hurt the business. That can mean several months of business bank statements or a current balance sheet.
On FHA, using business funds for closing is one of the things that keeps the business return requirement in place.
Documents to Gather Before You Apply
- Personal federal tax returns for the last two years, signed, with every schedule
- Business federal tax returns for the last two years, if your business files its own (Form 1065, 1120S, or 1120)
- Schedule K-1s for partnerships and S corps
- A year-to-date profit and loss statement (and balance sheet if you're not a Schedule C filer) if it's been more than a calendar quarter since your tax year ended, for FHA
- Business bank statements, if business funds will be used
- Something that confirms the business exists, such as a business license, an IRS EIN confirmation letter, or articles of incorporation
Two more verification steps to know about:
- IRS Form 4506-C. Fannie Mae requires each borrower whose income is used to sign one at or before closing so the lender can pull IRS transcripts. If you have both personal and business returns, you'll sign separate forms for each. Each form is valid for 120 days after you sign it.
- Verbal verification of employment. For self-employment income, Fannie Mae requires the lender to verify, within 120 calendar days before closing, that your business still exists and you're still doing the same work.
What "most recent" return means: Fannie Mae defines it as the last return scheduled to have been filed with the IRS. If you're buying in the spring and haven't filed yet, talk to me about timing.
How to Prepare for a Self-Employed Mortgage
- Talk to me before you file your taxes. Your returns are the record. A conversation with your tax professional about the trade-off between deductions and qualifying income is worth having before the return is final.
- Keep business and personal money separate. It makes the asset review much simpler.
- Watch the trend. A big drop from one year to the next draws a closer look.
- Pay down personal debts if your DTI is tight.
- Get preapproved early. A mortgage preapproval with full returns reviewed up front beats finding out during underwriting.
If one program's rules don't fit your returns, the other's might. My FHA loan requirements in Texas guide and conventional loans page cover the other parts of each program.
Frequently Asked Questions
Can I get a mortgage if I am self-employed?
Yes. Fannie Mae and FHA both allow self-employment income. You are treated as self-employed if you own 25 percent or more of a business, and lenders generally want a two-year history documented with your federal tax returns. Your qualifying income comes from a written analysis of those returns, not your gross sales.
How many years of tax returns do self-employed borrowers need?
Usually two years of personal returns, and often two years of business returns. Fannie Mae allows one year of personal and business returns if the business has existed for five years and you have owned at least 25 percent for five straight years. FHA can waive business returns when your personal returns show increasing self-employment income and other conditions are met.
Can I get a mortgage with less than two years of self-employment?
Sometimes. Fannie Mae may count your income if your most recent signed returns show 12 months from the current business and you earned similar income in the same field before. FHA allows one to two years of self-employment if you worked at least two years before in the same or a related line of work.
Do tax write-offs lower my mortgage qualifying income?
They can, because lenders start from the net income on your returns. Fannie Mae's Cash Flow Analysis adds back some non-cash items for Schedule C filers, such as depreciation, depletion, business use of home, and amortization, so not every deduction reduces your qualifying income dollar for dollar.
What happens if my self-employment income went down?
Lenders look at the trend. HUD says that if business income declines more than 20 percent over the analysis period, an FHA loan must be manually underwritten. Fannie Mae requires a trend analysis of the business. A decline does not automatically disqualify you, but expect more questions and documentation.
Ready to See What You Qualify For?
Send me your last two years of returns and I'll walk you through how a lender will read them before you're under contract.
Get Pre-Approved | Book a Free Consultation
Related Guides
- Debt-to-Income Ratio for a Mortgage
- Mortgage Preapproval in Texas
- The Mortgage Underwriting Process
- FHA Loan Requirements in Texas
- Conventional Loans
- How Much House Can I Afford in Texas?
Sources
- Fannie Mae Selling Guide: B3-3.5-01, Underwriting Factors and Documentation for a Self-Employed Borrower, B3-3.1-02, Tax Return and Transcript Documentation Requirements, and B3-3.1-04, Verbal Verification of Employment
- Fannie Mae: Cash Flow Analysis (Form 1084)
- U.S. Department of Housing and Urban Development: Single Family Housing Policy Handbook 4000.1, Self-Employment Income
Taylor Ring, NMLS #2809683 | Fairway Independent Mortgage Corporation, NMLS #2289 | The Wood Group of Fairway, 127 Lake Rd Ste 300, Belton, TX 76513 | Equal Housing Opportunity. This is not a commitment to lend. All loans are subject to credit approval and program guidelines, and approval, rates, and program availability are not guaranteed. Qualifying income is determined by the lender's review of your documentation. This article is general information, not legal, tax, or financial advice.