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Module 13 · Intermediate · 25 min

Self-Employed Borrower Credit & Income

Self-employed buyers face stricter income documentation and underwriting scrutiny. This module covers the 2-year tax return rule, add-backs, and how aggressive write-offs sabotage approval.

Learning Objectives
  • Explain the two-year self-employment history rule
  • Identify add-backs (depreciation, depletion, one-time losses)
  • Recognize how Schedule C write-offs reduce qualifying income
  • Differentiate full-doc vs. bank-statement options for self-employed

The Two-Year Rule

Fannie, Freddie, FHA and VA generally require two full years of self-employment history before income can be used. Lenders average the two most recent years' net income, and if year two is lower than year one, they often use the lower year.

Add-Backs That Help

Underwriters add back non-cash and one-time items to net profit:

  • Depreciation
  • Depletion and amortization
  • Business-use-of-home expenses
  • One-time casualty losses

The Write-Off Trap

Every dollar a self-employed borrower writes off on Schedule C lowers qualifying income roughly four-to-one in buying power. A buyer who nets $40,000 after $60,000 in write-offs qualifies as a $40K earner, not a $100K earner.

Key Takeaways
  • Two-year self-employment history is the agency standard.
  • Lenders average two years and may use the lower year.
  • Aggressive write-offs destroy qualifying income.
End-of-Module Exam

Module 13 Exam — 5 questions

Pick the best answer for each question. Pass with 80% or higher to mark this module complete.

  1. 1.

    Standard self-employment history required by Fannie/Freddie is:

  2. 2.

    Which is a legitimate add-back to self-employed income?

  3. 3.

    A buyer nets $40K after $60K in write-offs. Their qualifying income is approximately:

  4. 4.

    When year-two income is lower than year-one, lenders usually:

  5. 5.

    A bank-statement loan is most appropriate for:

0 of 5 answered