Calculating Self-Employment Income: Fannie Mae vs FHA/VA Loans

If you're self-employed and applying for a mortgage, understanding how lenders calculate your income is crucial. Different loan programs have different rules, and the way your income is analyzed can significantly impact your loan approval and the amount you qualify for. Here's a comprehensive breakdown of how Fannie Mae, FHA, and VA loans handle self-employment income calculations.

What Qualifies as Self-Employment?

Before diving into calculations, you're generally considered self-employed if you:
- Own 25% or more of a business
- Work as an independent contractor or freelancer
- Receive income reported on 1099 forms
- Have ownership in a partnership or S-corporation

Documentation Requirements

All three loan programs require similar documentation, typically including:
- Two years of personal tax returns (1040s) with all schedules
- Two years of business tax returns (1065, 1120, or 1120S)
- Year-to-date profit and loss statement
- Balance sheet (current within 60-90 days)
- Business license or evidence of self-employment

Fannie Mae Self-Employment Income Calculation

The Two-Year Average Method
Fannie Mae typically uses a two-year average of your adjusted gross income from self-employment.

Declining Income Consideration
If your income is declining from year to year, Fannie Mae may use the most recent year's income instead of the average, or they may not consider the income stable enough to qualify.

FHA Self-Employment Income Calculation

FHA guidelines are similar to Fannie Mae but with some key differences in interpretation and flexibility.
FHA also uses a two-year average but allows for more flexibility in certain situations

VA Calculation Method

The VA uses the same fundamental two-year average approach.
Business Cash Flow: VA may consider the cash flow of the business more holistically, particularly for veterans who recently started businesses after military service.

Special Scenarios
Multiple Businesses - If you own multiple businesses, income from each must be calculated separately and then combined. Losses from one business may offset income from another.

Business Ownership Less Than 25% - If you own less than 25% of a business, you may not be considered self-employed. The K-1 income can be used if:
- You've received it for two years
- The income is expected to continue
- You provide business tax returns

Conclusion

While all three loan programs use similar methods to calculate self-employment income, understanding the nuances can make the difference in your loan approval. Fannie Mae tends to be the most stringent, FHA offers middle-ground flexibility, and VA provides the most accommodating approach for eligible veterans.

The key to success is preparation: maintain clean financial records, work with a knowledgeable CPA, and connect with a loan officer experienced in self-employed borrowers well before you're ready to purchase. With proper planning, self-employment doesn't have to be a barrier to homeownership—it just requires understanding the rules of the game. 

Ready to explore your mortgage options? Our team specializes in helping new homeowners navigate complex financing decisions. Contact us today for personalized guidance on an income strategy that makes sense for you.