source:
  type: guide
  id: fnma-sel-b3-3.5-01
  authority: Fannie Mae Selling Guide B3-3.5-01 — Underwriting Factors and Documentation
    for a Self- Employed Borrower
  description: Fannie Mae Selling Guide B3-3.5-01 — Underwriting Factors and Documentation
    for a Self- Employed Borrower.
  coverage_tier: operative
obligations:
- id: fnma-sel-b3-3.5-01-full
  canonical_id: fnma-sel-b3-3.5-01-full
  section: Fannie Mae Selling Guide B3-3.5-01 — Underwriting Factors and Documentation
    for a Self- Employed Borrower
  type: do
  tags:
  - regulator-direct
  - fnma
  - selling-guide
  - corpus-expansion
  - tier-operative
  primary_source:
    tier: 1
    authority: Fannie Mae Selling Guide B3-3.5-01 — Underwriting Factors and Documentation
      for a Self- Employed Borrower
    source_class: fnma-guide
    source_url: https://singlefamily.fanniemae.com/media/document/pdf/selling-guide
    snapshot_id: 5f7b8b79da595d76
    fetched_at: '2026-05-25T14:09:57Z'
    content_hash: sha256:98cf85a02861bbe84914a0e339b327c8fc131869a8a573882007bbeea60c5701
    paragraph_quote: 'B3-3.5-01, Underwriting Factors and Documentation for a Self-
      Employed Borrower (12/13/2023) Introduction This topic contains general information
      on underwriting factors and documentation for a self-employed borrower, including:
      Overview Factors to Consider for a Self-Employed Borrower Length of Self-Employment
      Veriﬁcation of Income Analysis of Borrower’s Personal Income Analysis of Borrower’s
      Business Income Use of Income Calculator Use of Business Assets Income Veriﬁcation
      for Self-Employed Co-Borrowers Verbal Veriﬁcation of Employment Overview When
      determining the appropriate qualifying income for a self-employed borrower,
      it is important to note that business income (speciﬁcally from a partnership
      or S corporation) reported on an individual IRS Form 1040 may not necessarily
      represent income that has actually been distributed to the borrower. The fundamental
      exercise, when conducting a self-employment income cash ﬂow analysis, is to
      determine the amount of income that can be relied on by the borrower in qualifying
      for their personal mortgage obligation. When underwriting these borrowers, it
      is important to review business income distributions that have been made or
      could be made to these borrowers while maintaining the viability of the underlying
      business. This analysis includes assessing the stability of business income
      and the ability of the business to continue to generate suﬃcient income to enable
      these borrowers to meet their ﬁnancial obligations. Factors to Consider for
      a Self-Employed Borrower Any individual who has a 25% or greater ownership interest
      in a business is considered to be self-employed. The following factors must
      be analyzed before approving a loan for a self-employed borrower: the stability
      of the borrower’s income, the location and nature of the borrower’s business,
      the demand for the product or service oﬀered by the business, the ﬁnancial strength
      of the business, and the ability of the business to continue generating and
      distributing suﬃcient income to enable the borrower to make the payments on
      the requested loan. Published May 6, 2026 363 Length of Self-Employment Fannie
      Mae generally requires lenders to obtain a two-year history of the borrower’s
      prior earnings as a means of demonstrating the likelihood that the income will
      continue to be received. However, the income of a person who has less than a
      two-year history of self-employment may be considered, as long as the borrower’s
      most recent signed personal and business federal income tax returns reﬂect a
      full year (12 months) of self-employment income from the current business. The
      loan ﬁle must also contain documentation to support the history of receipt of
      prior income at the same (or greater) level and in a ﬁeld that provides the
      same products or services as the current business, or in an occupation in which
      they had similar responsibilities to those undertaken in connection with the
      current business. In such cases, the lender must give careful consideration
      to the nature of the borrower’s level of experience, and the amount of debt
      the business has acquired. Veriﬁcation of Income The lender may verify a self-employed
      borrower’s employment and income by obtaining from the borrower copies of their
      signed federal income tax returns (both individual returns and in some cases,
      business returns) that were ﬁled with the IRS for the past two years (with all
      applicable schedules attached). Alternatively, the lender may use IRS-issued
      transcripts of the borrower’s individual and business federal income tax returns
      that were ﬁled with the IRS for the most recent two years—as long as the information
      provided is complete and legible and the transcripts include the information
      from all of the applicable schedules. (See B3-3.1-02, Tax Return and Transcript
      Documentation Requirements.) 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. Note: Alternative documentation
      to establish the number of years the borrower has ownership of 25% Published
      May 6, 2026 364 or more in a business may be obtained as long as the documentation
      clearly identiﬁes the speciﬁc business listed on the Form 1003 and is supported
      by the most recent year tax returns. Documentation must be obtained through
      a reliable source, such as an IRS-Issued Employer Identiﬁcation Number Conﬁrmation
      letter, business license, articles of incorporation, or partnership agreements.
      When two years of signed individual federal tax returns are provided, the lender
      may waive the requirement for business tax returns if: the borrower is using
      personal funds to pay down payment and closing costs and satisfy applicable
      reserve requirements, the borrower has been self-employed in the same business
      for at least ﬁve years (requirements noted above), and the borrower''s individual
      tax returns show an increase in self-employment income over the past two years
      from the respective business. Analysis of Borrower’s Personal Income The lender
      must prepare a written evaluation of its analysis of a self-employed borrower’s
      personal income, including the business income or loss, reported on the borrower’s
      individual income tax returns. The purpose of this written analysis is to determine
      the amount of stable and continuous income that will be available to the borrower.
      This is not required when a borrower is qualiﬁed using only income that is not
      derived from self- employment and self-employment is a secondary and separate
      source of income (or loss). Examples of income not derived from self-employment
      include salary and retirement income. The lender may use Cash Flow Analysis
      ( Form 1084), another type of cash ﬂow analysis, or an automated tool such as
      Fannie Mae-approved vendor tools or the Income Calculator, that apply the same
      principles as Form 1084. A copy of the written analysis and conclusions or the
      Findings Report generated by Income Calculator must be retained in the loan
      ﬁle. The lender may receive representation and warranty enforcement relief of
      the calculated amount if certain requirements are met. See A2-2-04, Limited
      Waiver and Enforcement Relief of Representations and Warranties for additional
      information. Analysis of Borrower’s Business Income When a borrower is relying
      upon self-employed income to qualify for a loan and the requirements that permit
      the lender to waive business tax returns are not met, the lender must prepare
      a written evaluation of its analysis of the borrower’s business income. The
      lender must evaluate the borrower’s business through its knowledge of other
      businesses in the same industry to conﬁrm the stability of the borrower’s business
      income and estimate the potential for long-term earnings. The purpose of this
      analysis is to: consider the recurring nature of the business income, including
      identiﬁcation of pass-through income that may require additional evaluation;
      measure year-to-year trends for gross income, expenses, and taxable income for
      the business; determine (on a yearly or interim basis) the percentage of gross
      income attributed to expenses and Published May 6, 2026 365 taxable income;
      and determine a trend for the business based on the change in these percentages
      over time. The lender may use Fannie Mae’s Comparative Income Analysis (Form
      1088), Fannie Mae''s Income Calculator, or any other method of trend analysis
      that enables it to determine a business’s viability, as long as the method used
      fairly presents the viability of the business and results in a degree of accuracy
      and a conclusion that is comparable to that which would be reached by use of
      Form 1088. A copy of the written analysis and conclusions or the Findings Report
      generated by Income Calculator must be retained in the loan ﬁle. Use of Income
      Calculator The lender may use Income Calculator to calculate the monthly qualifying
      income from self-employment. Income Calculator will provide a complete analysis
      of self-employment income for each borrower on a business- by-business basis
      and produce a Findings Report. This tool can be used for loans underwritten
      manually or loan caseﬁles submitted to DU. The Income Calculator Findings Report
      summarizes the overall qualifying income amount, trending analysis, business
      liquidity, and provides speciﬁc messaging for each business evaluation. These
      detailed messages are designed to assist lenders in processing and underwriting
      self-employed borrowers while providing certainty of the income calculation.
      See B3-3.1-09, Income Calculator for additional information. Use of Business
      Assets When a borrower is using self-employment income to qualify for the loan
      and also intends to use assets from their business as funds for the down payment,
      closing costs, and/or ﬁnancial reserves, the lender must perform a business
      cash ﬂow analysis to conﬁrm that the withdrawal of funds for this transaction
      will not have a negative impact on the business. To assess the impact, the lender
      may require a level of documentation greater than what is required to evaluate
      the borrower’s business income (for example, several months of recent business
      asset statements in order to see cash ﬂow needs and trends over time, or a current
      balance sheet). This may be due to the amount of time that has elapsed since
      the most recent tax return ﬁling, or the lender’s need for information to perform
      its analysis. See B3-4.2-02, Depository Accounts, for requirements when self-
      employment income is not being used to qualify, but business assets are being
      used for the down payment, closing costs, and/or ﬁnancial reserves. Income Veriﬁcation
      for Self-Employed Co-Borrowers When co-borrower income that is derived from
      self-employment is not being used for qualifying purposes, the lender is not
      required to document or evaluate the co-borrower’s self-employment income (or
      loss). Any business debt on which the borrower is personally obligated must
      be included in the total monthly obligations when calculating the debt-to-income
      ratio. Verbal Veriﬁcation of Employment Published May 6, 2026 366 For requirements
      regarding verbal VOEs, see B3-3.1-04, Verbal Veriﬁcation of Employment. Recent
      Related Announcements The table below provides references to recently issued
      Announcements that are related to this topic. Announcements Issue Date Announcement
      SEL-2023-11 December 13, 2023 Announcement SEL-2023-09 October 04, 2023 Announcement
      SEL-2022-10 December 14, 2022'
  judgment: false
