Navigating mortgage approval as a self-employed individual can be complex because your income is often less consistent than that of W-2 employees. The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, provides clear guidelines that lenders follow to verify and calculate self-employed income for mortgage qualification.
Who is Fannie Mae?
Fannie Mae is a government-sponsored enterprise that buys mortgages from lenders, allowing them to issue more home loans. It does not lend money directly but sets the standards—known as “conforming loan” guidelines—that lenders must use when preparing loans to sell to Fannie Mae.
Key Aspects of FNMA Self-Employed Income Guidelines
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Two-Year History Requirement:
Lenders generally require two years of signed federal tax returns (including all schedules) to analyze income trends and verify stability. This helps smooth out fluctuations in a self-employed borrower’s earnings. -
Income Averaging:
Income is typically averaged over the most recent 24 months to obtain a stable qualifying figure. For example, if year one net income is $60,000 and year two is $80,000, the monthly qualifying income is ($60,000 + $80,000) ÷ 24 = $5,833. -
Adding Back Non-Cash Expenses:
Some deductions on tax returns reduce taxable income but are non-cash expenses such as depreciation, amortization, depletion, and business use of home. FNMA guidelines allow lenders to add these amounts back to net income to more accurately reflect cash flow.
How Lenders Evaluate Self-Employment Income
Lenders look for consistent, stable income that is likely to continue. Declining income may require additional explanation or may reduce the qualifying amount. Less than two years of self-employment history makes qualifying more challenging but can be mitigated by strong previous employment in the same field.
Practical Example
A freelance graphic designer reports on Schedule C: Net Profit $72,000, Depreciation $4,000, and Business Use of Home $3,000. Lenders add the depreciation and home office deductions back, making the adjusted annual income $79,000, which is then averaged with the prior year’s income to find the qualifying amount.
Tips for Self-Employed Borrowers
- Maintain clear, separate business and personal records.
- Consult with an experienced mortgage professional before applying.
- Strategize with your accountant on deductions if planning a home purchase soon.
- Prepare full documentation, including tax returns, profit and loss statements, and business bank statements.
For more information on verifying incomes, see our Self-Employed Income Verification guide.
References
- Fannie Mae Selling Guide on Business Income: Fannie Mae Business Income
- NerdWallet article on Self-Employed Mortgages: NerdWallet Self-Employed Mortgage