Selling Guide

Published April 07, 2021

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How is self-employment income verified?

Verification of Income

The lender may verify a self-employed borrower’s employment and income by obtaining from the borrower copies of his or her 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 B3-3.1-06, Requirements and Uses of IRS IVES Request for Transcript of Tax Return Form 4506-C.)

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 his or her own personal funds to pay the 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, and
  • the borrower’s individual tax returns show an increase in self-employment income over the past two years.

For certain loan casefiles DU will issue a message permitting only one year of personal and business tax returns, provided lenders document the income by:

  • obtaining signed individual and business federal income tax returns for the most recent year,
  • confirming the tax returns reflect at least 12 months of self-employment income, and
  • completing Fannie Mae’s Cash Flow Analysis (Form 1084)* or any other type of cash flow analysis form that applies the same principles.

For additional information, see B3-3.2-01, Underwriting Factors and Documentation for a Self-Employed Borrower

*For a complete list of forms used in fulfilling requirements contained in the Selling and Servicing Guides, see the Guide Forms page.

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