The short answers. Under Fannie Mae's rules a lender generally wants a two-year history of your earnings, backed by two years of signed federal tax returns with all schedules (or IRS transcripts), and often business returns too. You also sign IRS Form 4506-C so the lender can check them. It then works your income out as cash flow from your net profit, adding back items such as depreciation. Anyone with 25% or more of a business counts as self-employed. Use the tool below to see how a Schedule C turns into qualifying income. Other lenders and loan types have their own rules.
Who counts as self-employed
Fannie Mae's Selling Guide says any individual with a 25% or greater ownership interest in a business is considered self-employed. A lender must weigh the stability of your income, where the business is and what it does, demand for what it sells, its financial strength, and its ability to keep generating and paying out enough income to cover your mortgage (Fannie Mae Selling Guide B3-3.5-01). One point matters for owners of partnerships and S corporations: income reported on your personal return may not be income you actually received, so lenders look at what has been, or could be, distributed to you without harming the business.
How long you need to have been self-employed
| Your situation | What Fannie Mae's guide says |
|---|---|
| Two years or more | The usual case: lenders generally obtain a two-year history of earnings. |
| Less than two years | Can be considered if your most recent signed personal and business federal returns show a full 12 months of self-employment income from the current business, and the file documents earlier income at the same or greater level in the same field or a similar occupation. The lender must consider your experience and the debt the business has taken on. |
| An established business (5 years, 25% or more) | The lender may use one year of personal and business returns if the business has existed for five years and you have owned 25% or more for five years in a row, plus other conditions in the guide. |
The documents lenders ask for
The core of the file is your tax returns. The rules are in Fannie Mae Selling Guide B3-3.5-01 and B3-3.1-02 (tax returns and transcripts), and what you hand over depends on how your business is set up (B3-3.5-02 (business structures)):
| Business type | Where the income shows up | What to expect to provide |
|---|---|---|
| Sole proprietor (freelancer, contractor) | Schedule C on your personal Form 1040. | Signed personal returns for two years with all schedules, or IRS transcripts. A profit and loss statement may also be requested. |
| Partnership or LLC taxed as a partnership | The business files Form 1065 and you get a Schedule K-1. | Personal returns and, in many cases, business returns. Your share counts only if the lender documents that it was distributed to you or that the business has enough liquidity to pay it out. |
| S corporation | The business files Form 1120S and you get a Schedule K-1, and you may also pay yourself wages. | Personal returns and, in many cases, business returns, and W-2s for wages you pay yourself. The same distribution or liquidity test applies to K-1 income. |
| Regular corporation | The business files Form 1120. | Corporation earnings can be used when you own 100% of it, according to Fannie Mae's Form 1084 worksheet. |
Other documents in the same rules: signed returns must be copies of what was filed, or the lender can accept e-filing proof, a signed IRS Form 4506-C, or transcripts instead of your signature. Fannie Mae's homebuyer checklist also lists profit and loss statements or business tax returns for business owners, a business license if you are self-employed, bank and investment statements, and a photo ID (Fannie Mae: Documents you need to apply for a mortgage). Lenders can ask for more.
IRS Form 4506-C
Form 4506-C is how a lender gets IRS transcripts of your return with your permission. According to Fannie Mae's guide, one form can cover up to four years or tax periods, it stays valid for 120 days after you sign, and only one tax form can be requested on each, so a borrower with personal and business returns signs one for the personal returns and a separate one for the business returns. The lender must complete the form with its own name, the years being used and the date before you sign. The IRS's form carries the same warning, not to sign until every applicable line is complete (IRS Form 4506-C). If a lender gets the transcripts before closing, it does not need an additional signed 4506-C for them.
Waiving business returns
A lender may skip the business returns when you provide two years of signed personal returns, you are paying the down payment, closing costs and reserves with personal funds, you have run the same business for at least five years, and your personal returns show your self-employment income rising over the past two years. Otherwise the lender must also analyze the business income, comparing gross income, expenses and taxable income from year to year to judge whether the business is stable.
How your income is worked out
Lenders do not use the profit on your return as it stands. Fannie Mae's guidance says the purpose is to find the amount of stable and continuous income you can rely on, and it tells lenders to focus on earnings trends and the actual sources of income, and to leave out income that does not appear stable or likely to continue (B3-3.6-01 (analyzing individual tax returns)). For a sole proprietor, the adjustments are set out in B3-3.6-03 (Schedule C) and in the Schedule C lines of Fannie Mae Cash Flow Analysis, Form 1084:
| Schedule C item | What the lender does |
|---|---|
| Net profit or loss | The starting point. |
| Other income that is not recurring | Subtract it, unless it is recurring. |
| Other loss that will not continue | Can be added back. |
| Depreciation and depletion | Add back. |
| Business use of home | Add back. |
| Amortization and casualty loss | Add back. |
| Meals and entertainment excluded for tax reporting | Subtract the excluded portion. |
Try it with your own Schedule C
Enter figures from your last two returns. Leave a box blank for zero, and use a minus sign for a loss. Nothing is saved or sent anywhere. Because the Selling Guide leaves the method of combining years to the lender, the tool shows each year separately and then a plain two-year average, and you should ask your lender how it calculates.
| Total debt limit | Room for housing per month |
|---|
An estimate for planning, not a lender's figure. It covers a sole proprietorship only. Partnership, S corporation and corporation income has more adjustments (see Form 1084).
The starting example above: a sole proprietor whose net profit was $58,000 in the older year and $66,000 in the most recent year. After the adjustments, cash flow is $63,600 and $71,000, a change of 11.6%, and a two-year average of $5,608 a month, against $5,167 a month from net profit alone. With $500 of other monthly debts, the room left for housing at Fannie Mae's total debt-to-income limits of 36%, 45% and 50% is $1,519, $2,024 and $2,304 a month (Fannie Mae Selling Guide B3-6-02). Those three ratios are Fannie Mae's 36% for manually underwritten loans, up to 45% with strong credit and reserves, and up to 50% for its automated system. Lenders can set their own limits. See the debt-to-income ratio calculator and house affordability calculator to turn income into a price range.
How your deductions and your mortgage interact
The calculation starts from your net profit, so anything that lowers it also lowers your starting figure. Some deductions are added back, such as depreciation and the business use of your home, but ordinary business expenses are not. That is why a return that minimizes taxable income can leave you with less qualifying income than you actually earn. There is nothing wrong with claiming legitimate deductions, but it is worth knowing about before you apply. Talk with a tax professional about timing, and see the self-employment tax guide and self-employment tax calculator for what your return shows.
Other things that trip up self-employed applicants
- Business debt you guaranteed. Fannie Mae's guide says business debt on which you are personally obligated must be included in your monthly obligations when the lender calculates your debt-to-income ratio.
- Down payment from the business. The lender must confirm that taking the money out will not hurt the business and may ask for several months of business statements or a current balance sheet.
- A drop between years. Because lenders look at trends and leave out income that does not look stable, a decline is a point to be ready to explain.
- Unfiled or unsigned returns. Returns must be copies of what was filed with the IRS and signed, or supported by e-filing proof, a signed 4506-C or transcripts.
- Credit. Score rules are the same as for other borrowers; see the credit score guide.
Bank statement loans: an option when tax returns understate your income
Everything above follows Fannie Mae's rules, which start from your tax returns. If heavy business write-offs make those returns show far less than you really earn, some lenders offer bank statement loans instead. These are non-QM loans, outside the conventional rules this guide covers. The lender qualifies you on 12 to 24 months of bank deposits rather than on your tax returns, which is why they are aimed at freelancers, 1099 workers and other self-employed borrowers with strong cash flow (New American Funding; AAA Capital Funding; eMetropolitan).
The lender still has to verify what you earn. The federal ability-to-repay rule requires a lender to verify income with third-party records and lists financial institution records among those it may use (12 CFR 1026.43(c)(4)). The lender pages we read describe averaging your deposits over the period. Business-account deposits are usually reduced by an expense factor, typically 50% (AAA Capital Funding; eMetropolitan), and AAA Capital Funding says a CPA letter can support a lower figure and that personal-account deposits can count in full (AAA Capital Funding).
The trade-offs, according to those lender pages:
- A larger down payment. Each lender sets its own minimum. Two pages list 10% to 20% down (AAA Capital Funding; eMetropolitan), one of them adding that 20% opens the best pricing (AAA Capital Funding), and a third lists 20% to 30% (New American Funding).
- A higher rate. New American Funding says bank statement rates are generally higher than conventional rates, typically by 0.5 to 2 percentage points (New American Funding). AAA Capital Funding says a 10% down payment brings higher rates and stricter credit requirements, often a 680 score or more (AAA Capital Funding).
- More cash left after closing. Reserves are usually required, typically 6 to 12 months of payments on one page (eMetropolitan).
- A track record. Two years of self-employment is typical (AAA Capital Funding; eMetropolitan).
These are lenders' own marketing pages, not offers, and terms differ from lender to lender. If this fits you, ask for a Loan Estimate and compare it against a conventional one in the loan offer comparison calculator, and read how to read a Loan Estimate first.
Steps to take before you apply
- Gather two years of complete, signed returns with every schedule, and business returns if you have a partnership, S corporation or corporation.
- Work out your own qualifying income with the tool above so the lender's number holds no surprises, then try different prices and rates in the mortgage calculator.
- Get your books up to date. Prepare a current profit and loss statement in case your lender asks for one, and collect business and personal bank statements.
- Ask lenders how they treat self-employed income. Use our questions to ask a mortgage lender, and ask which years they average and which documents they need.
- Get pre-approved, then use the mortgage documents checklist. See pre-approval vs prequalification and how long a mortgage takes to close.
Sources and review
Documentation, length of self-employment, business returns and business assets: Fannie Mae Selling Guide B3-3.5-01 (December 13, 2023 version). Business structures: B3-3.5-02 (business structures). Tax returns, transcripts and Form 4506-C: B3-3.1-02 (tax returns and transcripts) (June 3, 2026 version). Schedule C treatment: B3-3.6-03 (Schedule C) and Fannie Mae Cash Flow Analysis, Form 1084 (June 2019 edition), B3-3.6-01 (analyzing individual tax returns). Debt-to-income limits: Fannie Mae Selling Guide B3-6-02. IRS form: IRS Form 4506-C. Checklist of documents: Fannie Mae: Documents you need to apply for a mortgage. Apart from the bank statement section, these are Fannie Mae's rules for conventional loans. FHA, VA and USDA loans and Freddie Mac have their own requirements, and we did not read them for this page. The bank statement section rests on the federal verification rule (12 CFR 1026.43(c)(4)) and on three lenders' own program pages read on October 4, 2026 (New American Funding, AAA Capital Funding, eMetropolitan); we did not read other lenders' programs, and several lender sites block automated readers. Your lender's requirements come first. Last reviewed September 2026. See our methodology. This is general information, not financial or tax advice.