Self-employed buyers get approved all the time in Florida, from roofers and hair stylists to 1099 delivery drivers. What changes is the proof. Instead of pay stubs, the lender reads your tax returns, takes the net income left after business expenses, and averages it over two years. FHA and Fannie Mae treat anyone who owns 25% or more of a business as self-employed, and independent contractors who file a Schedule C are treated the same way.
How long you need to be in business
| Program | Standard | Shorter history |
|---|---|---|
| FHA | 2 years self-employed | 1 to 2 years, if you worked at least 2 years before that in the same or a related line of work |
| Conventional (Fannie Mae) | 2 years of earnings history | 12 months on your most recent return, if your prior job paid the same or more in the same field or similar role |
| VA | Generally 2 years in business | Considered case by case |
| USDA | 2 years of business earnings | None listed |
A hair stylist who worked six years in a salon and then rented her own chair 18 months ago can qualify on FHA, because the prior work is in the same line. Someone who left an office job to start a landscaping company a year ago usually needs more time in business, or a co-signer.
How the lender turns tax returns into income
The lender works from your federal tax returns, not your deposits. A contractor who billed $95,000 and deducted $37,000 in materials, fuel and insurance has $58,000 of income for the mortgage.
FHA takes the lesser of your two-year average and your most recent year. If income fell more than 20% over that period, the loan has to be underwritten by hand, which is called manual underwriting, and its ratio limits are lower.
Conventional lenders run a cash flow analysis (Fannie Mae's Form 1084) that adds back expenses that didn't cost cash that year, such as depreciation on a work truck.
Documents. FHA wants two years of complete personal tax returns and, in most cases, two years of business returns. Business returns can be skipped when your personal returns show rising self-employment income, your closing funds don't come from a business account, and the loan isn't a cash-out refinance. If more than three months have passed since your last tax year ended, FHA also wants a year-to-date profit and loss statement. Fannie Mae can accept one year of returns when the business has run five years and you've owned 25% or more of it the whole time.
A worked example
Luis runs a one-truck pressure washing company in Florida. His Schedule C net profit was $52,000 two years ago and $58,000 last year. His car payment and credit card minimums total $400 a month.
- Two-year average: $110,000 ÷ 24 = $4,583.33 a month
- Last year alone: $58,000 ÷ 12 = $4,833.33 a month
- FHA uses the lower: $4,583.33
On FHA at a 5.75% rate, with property tax of 0.95% a year and homeowners insurance of $283 a month, that income supports a price of $268,000. The house payment is $2,149.35, which is 46.9% of his income for housing and 55.6% with his $400 in debts, inside FHA's limits of 46.9% and 56.9% with an automated approval.
Reverse his years and the picture changes. With $60,000 two years ago and $50,000 last year, the two-year average is still $4,583.33, but last year works out to $4,166.67, and FHA uses that. His price drops to $239,000. The decline is 16.7%, under the 20% line, so the loan stays with automated approval.
If your returns come up short
- Plan your next return. Every deduction lowers the income a lender can use. If you're buying in the next year or two, talk with your tax preparer about the trade-off before you file.
- Add a co-signer. A parent's or grandparent's income is added to yours on FHA and Conventional loans.
- Count a spouse with W-2 pay. A spouse on the loan brings steady paycheck income that offsets an uneven business year.
- Clear a monthly debt. Paying off a car or a card raises the price when the total ratio is the limit.
- Use FHA 100% financing. A down payment assistance second covers the 3.5% down, so the cash you need for the business stays in the business.
The QualRate calculator runs your averaged net income through FHA, Conventional, VA and USDA at once. Self-employed income is the part that most often needs a broker's read before you apply, so call AAA Capital Funding at 888-601-8344 with your last two returns in hand and we'll calculate the figure a lender will use.