If you own 25% or more of a business, mortgage underwriting treats you as self-employed, and you'll qualify on what your tax returns say the business earned for you, not on revenue or on what's in the business bank account. On FHA and conventional loans, that usually means two years of personal tax returns (and business returns if you have a partnership or corporation), averaged through a cash flow worksheet that adds back things like depreciation. You can sometimes qualify with less than two years in business if you worked in the same field before, and Fannie Mae can accept one year of returns for a business that's been around five years. The big catch: every write-off that lowered your tax bill also lowered your qualifying income.
Below I'll walk through the documents, how the worksheet works for each business type, how declining income is treated, the specific FHA and Fannie Mae rules, and what to do when your returns don't support the loan you want.
Who counts as self-employed
Both FHA and Fannie Mae draw the line at a 25% or greater ownership interest in the business (HUD 4000.1 II.A.4.c.x(A); Fannie Mae Selling Guide B3-3.5-01). Below that, your income is usually treated like an employee's, from W-2s or K-1s. 1099 contractors with no business entity are self-employed too, and they report on Schedule C.
The rules by layer
FHA
- Length of self-employment. Two years. Between one and two years can count only if you worked at least two years before that in the same line of work or a related occupation.
- Declining income. Stable or increasing income is acceptable. If your effective income declined by more than 20% over the analysis period, the lender has to downgrade the file to manual underwriting.
- Tax returns. Complete personal returns for the most recent two years, all schedules. Business returns for two years too, unless your personal returns show increasing self-employment income, you're not using business funds to close, and it isn't a cash-out refinance. IRS transcripts can stand in for signed returns.
- Year-to-date figures. A year-to-date profit and loss statement and balance sheet are required if more than a calendar quarter has passed since your last tax year ended. Schedule C filers don't need the balance sheet. If the income used to qualify you is higher than your two-year average, HUD requires an audited P&L or signed quarterly tax return.
- The calculation. HUD uses the lesser of your two-year average (or the shorter period, where allowed) and your most recent one-year average.
Source: HUD 4000.1 II.A.4.c.x. These rules read the same in Update 17 of HUD's handbook, the version in effect today, and in Update 18, which lenders must use by Nov 10, 2026.
Conventional (Fannie Mae)
- Length of self-employment. Fannie generally wants two years. Less can work if your most recent returns show a full 12 months from the current business and you have a documented history of earning the same or more in the same kind of work.
- One year of returns. Allowed when the business has existed for five years and you've owned 25% or more for five consecutive years, with a cash flow analysis in the file.
- Business returns waived. When you provide two years of personal returns, use personal funds for down payment, closing costs and reserves, have been self-employed in the same business for five years, and your personal returns show rising income from it.
- Written analysis. The lender has to document a cash flow analysis (Fannie's Form 1084 or an equivalent tool) and, when business returns are required, a trend analysis of the business itself.
Source: Fannie Mae Selling Guide B3-3.5-01, dated Dec 13, 2023. Freddie Mac, VA and USDA have their own self-employment sections with similar ideas and different details.
Automated underwriting and our company
DU, LPA and FHA's TOTAL scorecard can sometimes change the documentation list, for example by asking for one year of returns instead of two. The findings decide what's needed on your file. We don't add our own overlays on self-employed income. The agency rules and the findings are the rules.
The documents
- Personal federal tax returns, all pages and schedules, usually for two years.
- Business returns (1065, 1120-S or 1120) for the same years if you own a partnership or corporation, unless a waiver applies.
- K-1s for every business you own a share of.
- IRS Form 4506-C, which you sign so the lender can pull transcripts and confirm the returns match what was filed.
- A year-to-date profit and loss, and a balance sheet if your business type needs one.
- Business bank statements, which can support that the P&L is plausible and the business is operating.
- Proof the business exists, like a license, a Texas assumed name certificate, a Texas Secretary of State filing, or a CPA letter.
An amended return filed the week you apply, raising income, draws attention instead of solving anything. If you amended for a legitimate reason, expect the underwriter to want the amended return, proof it was filed, and often proof any added tax was paid.
How the worksheet works
Fannie Mae points out that business income on your personal return may not be money that was actually distributed to you. The worksheet's job is to find income you can count on to pay a mortgage while the business stays healthy. It's built around how your business reports income:
- Sole proprietor (Schedule C). Starts with net profit, then adds back allowed non-cash or non-recurring items like depreciation, depletion, business use of home, and amortization or casualty losses. Some items, like non-deductible meals, may be subtracted.
- Partnership or S corporation (K-1). Your K-1 share counts if the business actually distributed cash to you or has enough liquidity to do so. W-2 wages you pay yourself from an S corporation are added separately.
- C corporation. Your personal income is usually your W-2 wages and dividends. The corporation's own profit can count only under narrow conditions, generally when you own all of it.
Other common adjustments: losses from another business you own reduce qualifying income; one-time gains like selling equipment are removed; business debts on your personal credit can sometimes be excluded if the business pays them and the returns show it; and short-term notes payable on the business return can reduce income unless they're routinely rolled over.
Averaging and trend
The underwriter generally averages qualifying income across the years in the file. If the latest year is higher, the average smooths it. If the latest year is lower, the guides lean on the lower number, and FHA's rule uses the lesser of the two-year and one-year averages. A sharp decline may not qualify until the income stabilizes, and on FHA, a drop of more than 20% sends the file to manual underwriting, which we do offer but which has its own standards.
The year-to-date P&L matters here. If it shows income continuing at or above the average, it supports the file. If it shows a drop, it can change the number. A P&L showing income the bank statements never received won't be believed.
Where the money lives
Money in your business account belongs to the business until the return and the guide treat it as yours. For income, spending from the business account and calling it salary still has to pass through the worksheet. For assets, using business money for the down payment usually requires showing the withdrawal won't hurt the business, often with a cash flow analysis or a letter from your tax professional. Big transfers between accounts also need a paper trail. See why lenders ask about large deposits.
The write-off trade
Write-offs lower your tax bill and your qualifying income by the same mechanism. That trade was made when the return was prepared, and a letter afterward can't reverse it. If you know you'll want a mortgage next year, talk with your tax preparer before filing so the decision about deductions is made knowing both effects. Your preparer decides the tax strategy. The worksheet decides the mortgage income.
Fictional example
This example is made up to show how the rules apply.
Carlos left a roofing company after six years and opened his own roofing business in Fort Worth 18 months ago. He has one full year of Schedule C income. On FHA, his self-employment income can count because he worked more than two years in the same line of work first. On Fannie Mae, his one full year on the current business plus his documented prior earnings in the same field can also work. His Schedule C shows heavy depreciation on a new truck, which the worksheet adds back. His year-to-date P&L shows income in line with last year. Whether he qualifies still depends on his debt-to-income ratio, credit and the rest of the file.
When the returns don't support the loan
If the business is real and healthy but the returns don't support the payment, the options are usually:
- Wait for another year of returns that shows higher income.
- Add a co-borrower whose income fits, with their debts included. See co-borrowers and cosigners.
- Change the loan amount with a larger down payment or a different house.
- Look at a non-QM program written to a private investor's guide, like a bank statement loan, a P&L loan or an asset-based loan. Those read different records of the same business. They still require a full ability-to-repay determination, and their terms differ from agency loans. See non-QM loans.
When agency financing could work, I'll compare both so you see the trade-offs side by side.
Common myths
- "Lenders use my gross revenue." They use net income from the returns, adjusted by the worksheet.
- "I need two full years, period." Not always. Prior experience in the same field can shorten it.
- "My accountant can write a letter saying I make more." A letter doesn't override the returns on an agency loan.
- "Self-employed people can't get FHA." They can, under HUD's self-employment rules.
- "Bank statement loans are no-doc." They're documented differently, not undocumented.
What to have ready
- Two years of personal returns, all pages and schedules, plus business returns if you have a partnership or corporation.
- K-1s for every business you own a share of.
- A year-to-date P&L, and a balance sheet if you're not a Schedule C filer.
- Recent business and personal bank statements, complete PDFs from the bank.
- Your ownership percentage in each business and the date you started.
- Your CPA's or tax preparer's contact.
- A list of business debts that show on your personal credit.
Next step
The clearest answer comes from running your actual returns through the worksheet before you shop. Send me your last two years of returns and I'll show you what an underwriter would count, and whether an agency loan or another path fits better. Book a call, or when you're ready, start an application.
Related questions
Sources
Links checked Oct 21, 2026.
- HUD Handbook 4000.1, II.A.4.c.x, Self-Employment Income (TOTAL) (Update 17, issued Nov 26, 2025, the version in effect today; Update 18, issued Aug 12, 2026, may be adopted now and must be used by Nov 10, 2026, and does not change the rules cited here): https://www.hud.gov/sites/default/files/OCHCO/documents/40001-hsgh-Update-17.pdf
- Fannie Mae Selling Guide B3-3.5-01, Underwriting Factors and Documentation for a Self-Employed Borrower (Dec 13, 2023; Guide published Oct 7, 2026): https://selling-guide.fanniemae.com/sel/b3-3.5-01/underwriting-factors-and-documentation-self-employed-borrower
- Fannie Mae Selling Guide B3-3.5-02, Business Structures: https://selling-guide.fanniemae.com/sel/b3-3.5-02/business-structures
- Fannie Mae Selling Guide B3-3.4-19, Schedule K-1 Income: https://selling-guide.fanniemae.com/sel/b3-3.4-19/schedule-k-1-income
- CFPB Regulation Z, 12 CFR 1026.43, Minimum standards for transactions secured by a dwelling (ability to repay): https://www.consumerfinance.gov/rules-policy/regulations/1026/43/
About the author: McKade Lively, NMLS 2704474, American Pacific Mortgage Corporation dba True North Home Loans, NMLS 1850.
Equal Housing Opportunity.
Last reviewed: Oct 2026