I will be in business for 7 years in spring of 2025. Last year my self-employed income was $130K, this is take home after all deductions, and not yet taxed (reported on tax return), this year I have experienced a good chunk of growth. I am projecting $170K (will report on tax return). Will they use the $170K of 2024 as income? I heard they use the last 2 years and average them so it will be 150K. I also heard if you have been in business for over specific amount of years, they will use the latest tax return instead of averaging it since the latest is higher than the 2023 return of 130K. Something along those lines. Will they go back beyond 2 years? in 2022, my business started to pick back up after Covid, it really took me a long time so my income was half of that. I’m getting a mix of different info, if someone can confirm this for me, I would appreciate it. Thank you in advance.
If you’ve been in business over 5 years you can generally just provide your most recent 1040 and they can use that to calculate your income. That being said, the lender can ask for more if they want. They will not use your YTD income.
@Addison
I don’t plan to apply until spring of next year. Generally they would only use 2024 tax return to calculate income if in business over 5 years?
Dana said:
@Addison
I don’t plan to apply until spring of next year. Generally they would only use 2024 tax return to calculate income if in business over 5 years?
Yep. But the underwriter can ask for more if they want so it’s not possible to say for sure.
@Addison
Got it, thank you!
Are you filing a schedule c?
If so, what is the amount on line 31?
That’s the rough estimate of your qualifying income (you can add back line 19 depreciation).
How many years depends on product type. FHA will require 2yrs and conventional will allow 1yr if you can prove been in business 5+ years
@Tobin
Yes schedule C, line 31 is $135,765 for year 2023 when I file next year, that line should be around 170K after all expenses and deductions for year 2024. I assume since I been in business for more than 5 years, they generally will only need year 2024? I am an LLC single member and incorporated with my state and have certificate and pay every year for the LLC report.
@Dana
If you go with conventional loan you can use just the most recent return.
If you go FHA then you will need most recent 2yrs
@Tobin
My tax situation is also a little complicated. In the earlier years of my business we were a multi-member LLC and filed a schedule-K (I used the schedule-K to add to my personal income tax 1040). Since I purchased the business a few years back, I never filed the 1065 tax for the business to be closed or select the last file year (I forgot the exact term) and just transitioned to schedule-C for my 1040. Now the IRS is saying I never filed a business tax since I purchased the business in 2021 and I need to file those to be closed and get a new EIN or something in that manner. I haven’t done that because the IRS owes me money for COVID and I’m afraid if I do a last file it may impact that money. In my situation does all this matter? or what matters is what I file on my personal tax (whether it be schedule-K derived from the 1065 or schedule-c) and what my income is on my personal tax?
@Dana
You need to fix this before you apply.
OP, here is the guideline from Fannie Mae (applies to Freddie Mac too) which are the guides most lenders use. Tl:dr you’re right. 5yrs in business and you can use latest years income.
The lender may provide one year of personal and business tax returns if the following requirements are met:
the business from which the borrower is using self-employed income must have been in existence for five years as reflected on the Form 1003, and the borrower has had an ownership share of 25% or more for the past five years consecutively, and
for partnerships, S corporations and corporations, the federal income tax return for the business must support the information reflected on the Form 1003. If the business was in existence prior to the borrower having 25% or more ownership, then the lender must demonstrate the borrower has had 25% or more ownership for at least five years consecutively.
for sole proprietorships, the individual federal tax return and any other documentation or information received must support the information reflected on the Form 1003 for the number of years the business has been in existence.
all businesses are assessed separately for the five-years in existence benchmark and the number of years of personal and federal income tax returns required could differ when there are multiple self-employment income sources.
the lender must complete Fannie Mae’s Cash Flow Analysis (Form 1084) or any other type of cash flow analysis form that applies the same principles. A copy of the written analysis must be included in the permanent loan file.
@Hollis
Thank you u/PoeticQuant that was really helpful.
Just talk to a loan officer? I’d much rather talk to a client 6 months before they want to buy and explain everything than have a client try to DIY it.
While some of the answers above is not wrong, they do miss a few details.
First of all, how many years of tax returns that you need to show depends on which mortgage programs: FHA, USDA, VA require 2 years of tax returns and conversion might only need 1 years if you can show proof that this particular business has been active for at least 5 years.
Next, what type of tax returns you need to show: if you file your business income on your personal schedule C tax returns then you provide whole package of tax returns. If you file business tax returns such as 1120, 1120S, 1065 then you need to provide whole package of personal + business tax returns.
Next, the numbers that is being used for your income usually is the before tax profit of your business averages over 12 months. However, there are some expenses that can be added back to the profit such as depreciation, depletion, amortization, home use, extraordinary or one-time loss while if you claim other income on your tax return then it will be deducted from your profit.
In conclusion, it’s great that you start preparing for your Spring mortgage now, it’s better to interview a few local mortgage brokers to find a knowledgeable and trustworthy loan officer that can help you preparing the correct way. There might be many moving pieces in your mortgage portfolio besides your income that need to be reviewed for the qualification. A great loan officer will provide you a personalized mortgage plan.
@Galen
I appreciate your help and insight. Yes, I will be going for conventional loan. I file personal tax with schedule-C attached only now (in 2022 and before that, it was 1065 partnership and I used schedule-K (total profit/loss from partnership) to attach to my personal return). 2023, 2024 is personal+schedule-C only, no more 1065. Glad to know that preparing now for spring pre-approval is the right way, thanks again!
For an FHA loan, it will be 2 years calculation off of tax returns. Conventional it will be one year. As long as your credit is solid (typically 700+), very good chance you can go conventional using the latest filed tax return to calculate income.
no income verification loan is only 1% higher than income verification loan, without all these headaches. you could always refinance later when you have w2 or mortgage rate decrease nationwide