Can you get a mortgage if your self-employed income declined?

Why a two-year average may overstate the income

Fannie Mae's self-employment guidance requires a review of business strength and income trends. The lender examines revenue, expenses and taxable income, rather than assuming a business with two filed returns has two equally usable years.

Its Income Calculator FAQ gives a specific example of the approach: when two years of tax data show declining self-employment income, the tool calculates a 12-month average and requires documentation supporting that the income has stabilized before it can be used. That describes Fannie Mae's tool, not a universal formula for every lender or loan program.

These figures illustrate the problem, not an underwriting result. They do not establish that $7,000 is eligible income, and 30% is not a cutoff being offered here. The lender must still assess stability, current information, ownership and the rules for the actual loan.

Find out which income actually fell

A lower total on a personal tax return can have several causes. Perhaps a separate W-2 job ended while business profit held steady. Perhaps sales fell, recurring expenses rose or an unusual expense reduced one year's results. Those situations call for different questions.

Your business structure also matters. Under Fannie Mae's S corporation guidance, a borrower with at least 25% ownership needs a business cash-flow review that establishes steady income and a positive direction for sales and earnings. If the business fails those standards, that business income cannot qualify. Ask which requirements apply to your ownership and entity.

Fannie Mae's individual-tax-return guidance tells lenders to examine each income source and its likelihood of continuing. It also provides for adjustments for a nonrecurring loss, such as an extraordinary one-time expense. That does not mean every deduction can be added back. Let the lender evaluate the expense and supporting records before treating it as an adjustment.

Prepare a simple explanation that ties the change to the records: what changed, when it happened and whether it continues. If an expense was unusual, identify it and have the supporting paperwork ready. If customers or contracts were lost, include the effect on the current business. A written explanation helps organize the review; it does not create qualifying income on its own.

Can this year's profit-and-loss statement help?

It can help the lender evaluate what is happening now. A profit-and-loss statement, often called a P&L, summarizes business income and expenses for a stated period. Fannie Mae permits lenders to use one to support income stability and continuance. Its guide does not require a year-to-date P&L for most businesses, but allows the lender to request one in the circumstances it describes.

Fannie Mae's Income Calculator does not collect year-to-date P&L data. However, its FAQ says the lender must consider a P&L included in the loan file when assessing stability and continuance. A calculation from filed returns therefore does not make current financial information irrelevant.

Label the period clearly and discuss seasonality. Comparing nine months of current results with a full prior year can obscure the pattern. Have comparable periods available where practical, and distinguish completed business activity from projected sales. Ask the lender what additional records would support its review. A stronger forecast alone is not a substitute for verified income.

What to ask before choosing a loan or a purchase deadline

1. What monthly income can you use? Ask for the amount, the source and the calculation period, including any adjustments.
2. What remains unresolved? Separate a lower usable amount from insufficient documentation or an income source the lender cannot establish as stable.
3. What records would answer the question? Ask which complete personal and business returns, current P&L, statements and supporting explanations are needed for your business structure.
4. What loan fits that income? Review the proposed payment, other debts, cash to close and reserves using the supported amount, rather than the better year alone.
5. What would waiting change? Ask what future evidence could matter. A later application date or another filed return does not guarantee eligibility.

These Fannie Mae examples concern loans evaluated under its requirements. Being self-employed does not automatically mean you need non-QM financing. If an alternative documentation path is considered, ask how that program evaluates the decline and compare its full terms. The bank-statement mortgage guide and 1099 income guide explain those separate documentation questions.

Use the payment calculator to explore a housing budget after discussing usable income. It estimates payments, not self-employed qualifying income or approval. If business age is the issue instead, see qualifying with a shorter self-employment history.

For a financing discussion with Fred Chilton at West Capital Lending, start with the filed returns, the reason for the change and current business records. Contact Fred to ask how the income change may affect your purchase or refinance plan before relying on a generic average.