Self-employed and buying in Maryland: how your income is verified, and what to have ready

Your income is what your tax returns show, not what your bank receives

If you own 25 percent or more of a business, Fannie Mae’s guide treats you as self-employed, and the lender verifies income from your signed federal returns, personal and, in some cases, business. What counts is the income left after business expenses, the amount you can rely on to pay a mortgage, not gross receipts and not the deposits in your account.

Freddie Mac puts the tradeoff plainly: deducting every business expense lowers your taxable income and your tax bill, but a lower number on your returns can mean a higher debt-to-income ratio when you apply. Nothing on this page tells you how to file; that is a question for your tax professional. It does tell you to look at your returns the way the lender will before you decide when to buy.

Two years of history, and why the trend matters

Fannie Mae generally requires two years of prior earnings to show the income is likely to continue, and Freddie Mac notes most lenders want at least two years of consistent self-employment in the same industry. The lender also looks at whether income is stable or increasing; a sharp drop from one year to the next raises questions and can lead to the lower year being used.

Less than two years is not always a dead end. The guide allows a shorter history when the most recent returns show a full twelve months of self-employment from the current business and you can document earlier income at the same level in the same line of work, for example W-2s from the job you did before going on your own.

• Two years of personal returns, and business returns if you file them separately.
• Prior W-2s if you were recently employed in the same field.
• A business license, client contracts, or a CPA letter to show the business is ongoing.

How the averaging works, and what can be added back

The lender turns your annual figures into a monthly qualifying income, typically by averaging the two years when income is stable or rising. Certain non-cash deductions, such as depreciation, may be added back because they did not actually leave your pocket; one-time items and income that stayed inside a partnership or S corporation and was never distributed to you may be excluded.

Fannie Mae’s guide describes this as a cash-flow analysis of both your personal income and the business: the stability of the income, the strength of the business, and its ability to keep paying you while staying viable. Ask your loan officer to walk you through the calculation for your returns so the preapproval amount is based on the number the underwriter will actually use.

The year-to-date profit and loss statement

Your last filed return can be many months old, so lenders commonly ask for a year-to-date profit and loss statement and sometimes a balance sheet. Its job is to show that the current year looks like the filed years. It should reconcile to your books and your bank activity; a P&L that shows far more than your returns will not raise the qualifying income, and one that shows far less can lower it.

Prepare it from the records you already keep. The IRS describes the basic obligations of a self-employed taxpayer, including tracking income and expenses and paying estimated taxes; the same records that keep you compliant are the ones that make a P&L credible.

Sourcing your down payment: traceable money, seasoned in your account

Self-employed buyers get tripped up here more than on income. The lender wants to see that the money for the down payment, closing costs, and reserves has been sitting in your accounts, usually shown with two months of bank statements, and that any large deposit came from an acceptable source. Fannie Mae defines a large deposit as a single deposit above half of your monthly qualifying income and requires documentation when those funds are needed for the purchase.

Business funds can be used, the guide says, if you are an owner of the account and the lender can see that taking the money out does not hurt the business. Do not move money between business and personal accounts right before you apply without asking first; each transfer becomes one more thing to document.

• Leave the money where it is for at least two months before you apply.
• Keep receipts for anything that explains a large deposit: an invoice paid, an asset sold, a refund.
• Do not deposit cash payments you cannot document into the account you plan to use.
• If you plan to use business funds, say so early so the cash-flow review can be done up front.

Your first call, and where your documents go

Start with a loan officer, not with a folder of documents. On the first call, describe how you are paid, how long you have been on your own, and what your returns roughly show; the loan officer tells you which loan types fit and exactly which documents to gather. In Maryland that first conversation is what Paola does at New Priority Lending Corp.

When you are ready, tax returns, statements, and your P&L go into the lender’s secure portal, never through this website’s contact form, an ordinary email, or a text. Keep a private list of what you sent and when, so the next request is easy to answer.

• Which years of returns, and personal, business, or both?
• Which of my income sources will you use, and how will you average them?
• Do you need a year-to-date P&L, a balance sheet, or both, and for what period?
• Is there anything on my returns you expect the underwriter to question?