How many years of tax returns do self-employed home buyers need?

• The general rule is two years. Fannie Mae, whose guide many lenders follow, normally calls for a two-year history and signed personal returns for those two years.
• One year can be enough if your business has been operating for five years and you meet the guide's other conditions. Your lender confirms.
• Under two years on your own, but with a full year on your returns, your income can still count if you earned the same or more doing the same or similar work before.
• Business returns are required in some cases and not in others, depending on how your business is set up and your history.
• Some loans review bank statements instead of relying only on returns. Not every lender offers them.

With a salaried buyer, the lender confirms income with the employer. With a business owner, the lender needs to see that your income is stable, and stability shows up over time. Two years lets them see whether your income is rising, falling or holding steady.

Fannie Mae's guide says a lender may verify a self-employed borrower's income with signed personal returns for the past two years, with all schedules, or with IRS transcripts. The federal ability-to-repay rule also recognizes IRS transcripts as a way to verify income.

From those returns, the lender runs a cash flow analysis. Fannie Mae publishes a form for it, Form 1084. In plain English: the lender starts from what your business earned according to your returns and works out the income they'll use to qualify you.

Here's what that means for you: one strong year isn't enough on its own. The lender looks at both years together. If one was great and the other was slow, that shows up in the calculation.

Fannie Mae's guide lets a lender use a single year of returns, personal and business, when the business has been operating for five years and you've held an ownership stake in it for those five years, under the guide's conditions.

When only one year is used, the guide requires the lender to complete the cash flow analysis in writing and keep it in the loan file.

It isn't automatic. It's something a lender may do, not something they must do. So ask directly: "Does my situation qualify for one year of returns?"

Something similar applies to business returns. The guide describes cases where they can be skipped: when you provide two years of personal returns, use your own funds for the down payment, closing costs and reserves, have been in the same business for five years, and show rising income. If that doesn't describe you, expect the lender to ask for them.

That doesn't mean you can't buy. Fannie Mae's guide says income from someone self-employed less than two years can be considered when:

• Your most recent returns show a full year of income from the current business.
• You previously earned the same or more in the same field or a similar line of work. For example, an electrician who worked for a contractor and now runs their own electrical business.
• The lender weighs your experience and the business's debt.

If you switched to a completely different line of work, it's a different conversation. Talk to a lender before you make plans.

Either way, keep your records from the job you had before: W-2s, pay stubs, anything that shows what you earned. They're what lets a lender connect your old work to your new business.

1. Make sure your last two returns are filed and signed. If one is missing, that's step one.
2. Request your IRS transcripts at irs.gov and check that they match your copies.
3. Gather your business returns, if your business files its own, in case the lender asks.
4. Pull your bank statements, business and personal, with deposits you can explain.
5. Ask the right question. Not only "do I qualify?" but "how many years will you need from me, with which documents, and what are my options if they don't line up?"
6. Pre-approval letter in hand, then the home search starts. Not before.

If you want your years and documents reviewed before you start looking, book 30 minutes at veronicayeary.com/en/book.

• Believing business owners have to wait many years. People say it all the time. The general rule is two years, and some cases need less. Your lender confirms yours.
• Filing a late return right before you apply. A rushed filing can raise questions. Get your years in order well ahead of time.
• Changing your line of work with no plan. If you move into very different work, your earlier history may not count, because the guide looks for the same or similar field. Talk to me and your CPA first.
• Writing off more without knowing how it looks on paper. Write-offs are legitimate, but they lower the income a lender counts. Don't change how you earn or file without talking to me first.
• Stopping at the first "no." One bank may review you for one type of loan. Another lender may have a different option, like a bank statement loan.

Picture the owner of an auto repair shop in Arlington. He spent years as a mechanic at a dealership, and a little over a year ago he opened his own shop. His first return as an owner already shows a full year.

He assumes he has to wait another year. Before deciding, he talks with a lender. Because it's the same kind of work and he earned about the same before, the lender says his file can be reviewed with what he has, and asks for that return, his earlier W-2s, and his bank statements.

With that answer in writing, he decides with his CPA whether to buy now or wait. That's an example, not a real client; your lender confirms what applies to you.

• Your last two personal returns, filed and signed.
• Your IRS transcripts, matching your copies.
• Your business returns, if there are any.
• How long your business has existed and how long you've owned it.
• Your previous work, if you've been on your own less than two years: what you did and what you earned.
• Your bank statements, in case a statement-based loan makes sense.

With the business owners Veronica Yeary works with in Dallas-Fort Worth, the years and the paperwork get reviewed before the first showing.

How many years of tax returns do I need to buy a house if I'm self-employed?

The general rule in Fannie Mae's guide is two years of signed personal returns, or IRS transcripts. In some cases one year can be used. Your lender tells you which applies.

Can I buy a house with only one year of tax returns?

Possibly. Fannie Mae's guide allows one year when your business is five years old and you meet the other conditions. If you've been self-employed less than two years, your income can also be considered when you earned the same or more in the same field before.

Will the lender want my business tax returns?

It depends. Sometimes they're required and sometimes not, based on how your business is set up and your history. Fannie Mae's guide describes when they can be waived. Your lender tells you whether you need them.

Can I use IRS transcripts instead of copies of my returns?

Yes. Fannie Mae's guide accepts IRS transcripts, and the federal ability-to-repay rule recognizes them for verifying income. You request them at irs.gov.

What if my returns show low income?

There are options. Some lenders offer loans that review your bank statements. Don't change how you earn or file without talking to me first; your lender confirms what fits.

Before you shop, it helps to know how many years a lender will ask of you, with which documents, and what your options are if they don't line up. That's a 30-minute conversation.

Let's talk for 30 minutes about your situation, not houses: veronicayeary.com/en/book

Call or text 469-441-8890 · veronica@veronicayeary.com

Veronica Yeary, Realtor®, CRS, ABR, SRS, CIPS · All City Real Estate DFW · Dallas-Fort Worth. This isn't legal, tax or loan advice: your lender and your CPA confirm your case.