Self-employed income is calculated through a written cash flow analysis of the borrower's personal and, where required, business federal tax returns, adding back non-cash and non-recurring items and removing income that will not recur. Fannie Mae accepts Form 1084, an equivalent analysis or its Income Calculator and has the lender confirm each income source is stable and likely to continue; Freddie Mac requires Form 91 or a similar form and, for significantly changed income, documentation that it is stable and likely to continue for the next three years. FHA uses the lesser of the two-year and one-year averages of gross self-employment income. If FHA business income declines by more than 20 percent, a TOTAL Scorecard loan must be manually underwritten, where the lender must document that the income is now stable.
Fannie Mae (conventional)
- The lender must prepare a written evaluation of the borrower's personal income, including business income or loss on the individual returns; it may use Cash Flow Analysis (Form 1084), another cash flow analysis, or Income Calculator. Fannie Mae B3-3.5-01
- The lender must confirm that each income source reported on Form 1040 is stable and likely to continue, and should not include income that does not appear stable or likely to continue. Fannie Mae B3-3.6-01
- Schedule C (sole proprietorship): non-recurring income, including any meals and entertainment exclusion, must be deducted; depreciation, depletion, business use of a home, amortization and casualty losses must be added back. Fannie Mae B3-3.6-03
- Partnership or LLC income from Schedule K-1 counts only if the lender documents that it was actually distributed at the level shown on the K-1, or that the business has adequate liquidity to support the withdrawal of earnings. Fannie Mae B3-3.7-01
- When business returns are required, the business itself must also be analyzed; the lender may use Comparative Income Analysis (Form 1088), Income Calculator or another comparable trend analysis. Fannie Mae B3-3.5-01
- For an S corporation, business income cannot be used to qualify unless the cash flow analysis confirms it is stable and consistent and that sales and earnings trends are positive. Fannie Mae B3-3.7-02
Freddie Mac (conventional)
- The Seller must analyze the tax returns and document the self-employed income calculation on Form 91, Income Calculations, or a similar alternative form. Freddie Mac 5304.1(f)
- Items that may be considered for inclusion in income on Form 91 include non-cash deductions (depreciation, depletion, amortization), non-recurring losses such as casualty loss, and loss carry-overs from previous tax years. Freddie Mac 5304.1(f)
- Partnership and S corporation income may be based on the borrower's proportionate share carried through Schedule K-1 to the personal return; cash distributions on the K-1 may not be used as qualifying income. Freddie Mac 5304.1(e)
- If income increased or decreased significantly, the Seller must document that the qualifying income is stable and likely to continue for the next three years. Freddie Mac 5304.1(f)
FHA
- The lender must use the lesser of the average gross self-employment income over the previous two years (or the shorter period earned, where permitted) and the average over the previous one year. FHA 4000.1 II.A.4.c.x
- Under TOTAL Scorecard underwriting, a decline of more than 20 percent in Effective Income over the analysis period requires a downgrade to manual underwriting. FHA 4000.1 II.A.4.c.x
- In manual underwriting, a decline of more than 20 percent in Effective Income requires the lender to document that the business income is now stable. FHA 4000.1 II.A.5.b.x
- In manual underwriting, income may be treated as stable after a 20 percent reduction if an extenuating circumstance caused it, income has been stable or increasing for at least 12 months, and the borrower qualifies on the reduced income. FHA 4000.1 II.A.5.b.x
- For Schedule C income, depreciation, depletion, business use of home, amortization and casualty losses may be added back to gross income. FHA 4000.1 Appendix 2.0
- If the income used to qualify exceeds the two-year average of tax returns, an audited profit and loss statement or a signed quarterly tax return from the IRS is required. FHA 4000.1 II.A.4.c.x
Sources
- Fannie Mae Selling Guide, September 2, 2026 version: B3-3.5-01, Underwriting Factors and Documentation for a Self-Employed Borrower (p. 365, 366); B3-3.6-01, General Information on Analyzing Individual Tax Returns (p. 373); B3-3.6-03, Income or Loss Reported on IRS Form 1040, Schedule C (p. 377); B3-3.7-01, Analyzing Partnership Returns for a Partnership or LLC (p. 384); B3-3.7-02, Analyzing Returns for an S Corporation (p. 385)
- Freddie Mac Single-Family Seller/Servicer Guide, September 16, 2026 version: 5304.1(f), Income calculation and fluctuation analysis (p. 5304-8, 5304-9); 5304.1(e), Business income: access and use (p. 5304-6)
- FHA Single Family Housing Policy Handbook 4000.1, August 12, 2026 version: II.A.4.c.x, Self-Employment Income (TOTAL) (p. 230, 231); II.A.5.b.x, Self-Employment Income (Manual) (p. 309); Appendix 2.0, Analyzing IRS Forms (p. 1751)
Agency guides set the baseline; individual lenders can add stricter overlays. Sources are the guideline versions in Zeitro Strata as of October 29, 2026.