A borrower is considered self-employed if they own 25.00% or more interest in a business. The four
basic types of business structures are: sole proprietorship, corporations, limited liability or “S”
corporations, and partnerships.
• The borrower must provide two years of individual federal tax returns and corporate
partnership federal tax returns (if applicable to business).
o Individual Federal tax returns show increasing self employed income over the
past two years,
• A profit and loss statement (P&L) and a balance sheet is required if more than a
calendar quarter has elapsed since date of most recent calendar year or fiscal-year
end tax return was filed by the borrower. If income used to qualify the borrower
exceeds the two-year average of tax returns, an audited P&L or signed quarterly tax
returns obtained from the IRS are required.
• The existence of the borrower’s business must be verified by a third party, such as a
CPA, regulatory agency, or the applicable licensing bureau if possible.
• The borrower’s business address and phone listing must be verified by using a
telephone book, the internet or directory assistance.
• If the contact is made verbally, then a Verbal Verification of Employment must be
completed to document the source of the information.
• CPA letters must be dated within 30 days of the NOTE date
Self-employed borrowers are required to have a minimum of 2 years consecutive self employment in the same business and geographic area.
self-employed income to be calculated using Fannie Mae Cash Flow Analysis
Business income is averaged over a two-year period using Federal Tax Returns.
In the case of declining income, significant compensating factors must exist to consider the
income in the qualifying ratios. A significant decline in income is not acceptable, even if the
current income and debt ratios meet HUD guidelines.
(1) Business Types for Self-Employed Borrowers
Sole Proprietorship: the total net profit of the business with depreciation or depletion
added back to the adjusted gross income.
Partnerships: the amount of the draw or bonus taken from the capital account plus the
borrower’s share of the net profit.
Corporations: the amount of wages or salary as shown on the W-2 plus any bonus or
other compensation, deducting any spousal income.
1.05.05 Commission Income
Commission income may be considered only if evidence of all of the following is provided:
• The borrower must furnish the most recent two years’ Federal tax returns, along with
his/her most recent pay stub.
• The commission income must be averaged over that two year period.
• Any un-reimbursed business expenses must be deducted from the borrower’s income.
Income received between one and two years may be considered if the underwriter is able to make
a sound rationalization for acceptance and can document the likelihood of continuance.
Commission income showing a decrease requires significant compensating factors to justify loan
Self-Employed Income for a Mortgage Loan Approval for Fannie Mae, FHA, VA, KHC, USDA and Rural Housing in Kentucky
Senior Loan Officer
Key Financial Mortgage Co. (NMLS #1800)*
107 South Hurstbourne Parkway*
Louisville, KY 40222*