Self-employed mortgage underwriting decoded — conventional 24-month income averaging, FHA 12-month rule, add-back analysis, bank-statement non-QM loans, and LLC pass-through income rules. With worked scenarios.
Yes. Fannie Mae and Freddie Mac both fund self-employed borrowers with 24 months of tax returns showing stable or increasing income. Income is averaged across the 2 years; a 20%+ decline year-over-year is a red flag that requires a CPA explanation letter. Most major lenders fund this paper.
FHA Handbook 4000.1 allows 12 months of self-employment history if the borrower has 2+ years of prior W-2 employment in the same line of work. This is one of the cleanest paths for someone who just went self-employed within the past year.
Underwriters add back depreciation, depletion, amortization, business-use-of-home, and casualty losses to your tax-return AGI to compute qualifying income. They subtract certain items too (one-time gains, non-recurring income). Form 1084 (Fannie Mae) and Form 91 (Freddie Mac) are the cash-flow analysis worksheets that show the math.
A non-QM (non-Qualified Mortgage) product that underwrites based on 12-24 months of business bank statements instead of tax returns. Used by self-employed borrowers whose tax returns understate true income because of aggressive deductions. Rate premium is typically 1-2 points above conventional; down payment usually 10-20% minimum.
Conventional and VA: generally yes, but Fannie Mae allows 1 year if the borrower has prior W-2 experience in the same field. FHA: 12 months with prior W-2 in the same line. Bank-statement non-QM: 24 months is standard, some lenders accept 12.
If the LLC is a disregarded entity (single-member, no S-Corp election), the Schedule C net income flows to the personal 1040 and counts directly. If it's an S-Corp, the W-2 you pay yourself counts as wage income; K-1 distributions can be added if you can document the business has sufficient liquidity to continue distributing. Partnership K-1 from a multi-member LLC is treated similarly.
Usually yes for conventional/FHA — they need 12-24 months of history. The workarounds: (1) qualify on W-2 income from a co-borrowing spouse, (2) bank-statement non-QM with 12 months, (3) asset-depletion loan if you have substantial savings, (4) wait until you have 2 full tax-return years.
Qualifying monthly income = (2-year average of add-back-adjusted income) ÷ 12. The total monthly housing payment + all other monthly debt is divided by that number for DTI. Conventional caps DTI at 50% for most files; FHA goes to 56.9% with strong compensating factors; non-QM bank-statement loans cap at 50% typically.
A 20%+ income decline year-over-year requires a CPA explanation letter stating it was non-recurring (COVID, market shift, planned investment, one-time write-off). If the lender accepts the explanation, they use the lower of the two years as qualifying income. If they don't, they decline or use a non-QM product.
Conventional rate-and-term refinance: usually no — lenders treat refinances the same way as purchase, requiring the 24-month history. Cash-out: even stricter. The exception is a streamline FHA refi (no income recheck) or a non-QM bank-statement refi. Most borrowers refinance to lock in a rate BEFORE leaving W-2 employment for exactly this reason.
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