Mortgage Help for the Self-Employed

Fannie Mae considers any individual who has a 25 percent or greater ownership interest in a business to be self-employed.

Fannie Mae considers income from self-employment as stable income if the borrower has been self-employed for two or more years. A person who has been self-employed for less than two years must have a two-year history of previous successful employment in the same occupation (or a related field) in order to be eligible for financing that is sold to Fannie Mae. In such cases, the borrower must be able to document a reasonable probability of success based on market feasibility studies and 'pro forma' financial statements for his or her business. The lender must carefully analyze the following factors: the borrower's training and experience, the location and nature of the business, and the demand for that type of business in the area.

Self-employed borrowers have different sources and documentation of their income than salaried borrowers. Because of this, Fannie Mae has different requirements for determining and verifying a self-employed borrower's income.
We require the following documentation for all self-employed borrowers, if their mortgage loan will be sold to Fannie Mae:
  • copies of signed individual federal income tax returns, including all applicable schedules, for the most current 2 years;
  • copies of signed federal business income tax returns for the last 2 years, including all applicable schedules, if the business is a corporation, an "S" corporation, or a partnership;
  • an individual credit report;
  • a year-to-date profit and loss statement, regardless of the type of business, if the loan application is dated more than 120 days after the end of the business' tax year;
  • a balance sheet for the previous 2 years if the business is a sole proprietorship; and,
  • the borrower's written permission to request copies of his or her tax returns for the past 2 years from the IRS should they later be needed for quality control purposes (some lenders use IRS form 4055).

The mortgage lender will develop an average monthly income by using at least two full years of the borrower's actual tax returns. When a year-to-date profit and loss statement is used, the income on that statement may be used in determining the monthly income if it is consistent with the previous years' earnings. Because self-employed income may change each year, an average better approximates the borrower's long-term earning ability. Projected income that cannot be verified is not acceptable for qualifying purposes.

The lender will also need to review the financial statements and tax returns for the self-employed borrower's business to analyze the business' financial strength and to confirm that it will continue to generate the income the borrower needs to qualify for the requested mortgage.
When you apply for a mortgage, you should talk with the loan officer about how the lender will calculate your income so that you are familiar with the process. Enclosed is a list of mortgage lenders in your state that sell loans to Fannie Mae. Please contact the lender of your choice for more information or you may call 1-800-7FANNIE (1-800-732-6643).

What is Fannie Mae? Fannie Mae is a shareholder-owned company that was chartered by Congress in 1938. Fannie Mae designs and invests in mortgages made to low-, moderate-, and middle-income home buyers. Because of Fannie Mae, local lending institutions such as banks, savings and loans, commercial banks, and credit unions have a constant source of lower cost funds to lend for a wide variety of affordable mortgages.