I constantly get questions about whether or not someone who is self-employed needs a minimum of two years of tax returns, or if they can get away with one year of them, when qualifying for a mortgage. I thought I would answer this question and put it to rest. Please realize guidelines can change in the future. As of the date of this blog, the hyperlinks below are guidelines related to the history that self-employed people need, and the number of years of tax returns they need to document their income.
Fannie Mae’s guidelines on self-employed mortgage borrowers.
Freddie Mac’s guidelines on self-employed mortgage borrowers.
If you have been self-employed and running your business for less than two years, you may want to use a Fannie Mae loan to have your best chance at qualifying for a mortgage.
If you have been self-employed for five years or longer, but only want to use your most recent years’ tax filing, Freddie Mac may be the best way to go.
Keep in mind, if you’ve only been self-employed for 12 months, that does not automatically mean that you’ll be eligible for a Fannie Mae loan. While it appears that Fannie Mae may be a viable option, it depends on the date you started your business. For example, if you opened your business in August of the prior year, and in August of the current year you want to qualify for a mortgage using a Fannie Mae backed loan, that’s likely to be a problem. Why? Because your last year’s tax returns are only going only include five months of income from August through December. An underwriter in this situation is typically going to want to see the full 12 months of income on a tax return.
A better situation would be if you started your business in January of the prior year, and then in January of this year, you’ll have 12 months in your self-employed business, and you will have 12 months of self-employed income to report on your tax filing for the prior year. If you quickly file your tax return for the prior year, you’ll have a full year’s income to report on one year of tax returns and can potentially use a Fannie Mae loan to qualify for a mortgage.
Self-employed people typically have extra layers of analysis to qualify for a mortgage. For example, you might not be able to use money from your business accounts for your mortgage. But, you might be able to have certain business debt excluded from your debt-to-income ratio.
As you can see above, there is some extra complexity in situations where you have not been self-employed for a long time. I can help you work through all of the complexities. Start by getting prequalified. There is no obligation to take a loan.
Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.
Hi Brian:
I really enjoy reading your blogs with all good information to help us all.
I am self employed and applied for a mortgage that is due to close next week. when I started the application I submitted 2 years of tax returns 2018 and 2019, the IRS shows only 2019 transcript but 2018 is still missing in the backlog trailers somewhere with the IRS. A week ago I e-filed the 2020 on line and it shows the 2020 transcript in the IRS system. My question is would you accept the 2020 and 2019 transcripts instead of the 2019 and 2018 transcripts that I submitted to the lender earlier ? (my 2018 transcript is still missing)
Your Reply is very appreciated
Hello Monty. I believe the lender would prefer to use your most recent two years filed tax returns. So if you filed your returns and transcripts are available for both 2019 and 2020, I believe your lender should accept that.