Fannie Mae Updates Guidelines For One Year of Self-Employment

Contrary to popular belief, Fannie Mae permits lenders to approve conventional loans for applicants with just one year of self-employment.

The agency updated its guidelines in late 2023 to be much more specific about the documentation needed.

If you’ve been denied before, you might now be approved, thanks to clarification from Fannie Mae.

How To Get Approved With One Year of Self-Employment

Fannie Mae requires lenders to prove income stability for the borrower.

The definition of “stable,” though, is constantly changing. Recently, Fannie Mae clarified what this means for self-employed borrowers, which could allow more buyers to be approved.

According to a Fannie Mae release on October 4, 2023, you must show:

• 12 months of self-employment on the most recent personal and business tax return
• The same or greater income from full-time employment prior to being self-employed
• That the previous position was in the same field and provides the same products or services as your self-employed business
• You had the same responsibilities in the previous occupation as in your new business
• You have solid experience in this career field
• You don’t have large debts from business startup costs

That sounds like a lot of requirements, but many applicants will meet them. Here’s an example to make things more clear.

Example of a Potentially Acceptable Scenario

For example, you worked full-time at a marketing agency for five years. You worked with a number of companies to market their services. You decided to start your own marketing consultancy. You had a $70,000 annual salary when you left.

You acquired clients and made $80,000 after business expenses in one calendar year, provable with filed tax returns.

In your self-employed business, you help clients market their companies, just as you did in the full-time role.

You apply for a loan as soon as you file taxes for the previous year. You can prove a full 12 months of higher self-employment income compared to the previous full-time job. You bootstrapped the new gig and haven’t financed any startup costs. You are a great candidate to be approved.

How Does the Fannie Mae Guideline Change Help Self-Employed Borrowers?

Often, lenders are leery of wading into the gray area when approving loans.

The recent guideline change from Fannie Mae makes the rules black and white as far as documentation.

When lenders know what they can and can’t do, they are more likely to approve a scenario. They won’t go out on a limb for a borrower.

Compare Fannie Mae’s new requirements to Freddie Mac’s regarding one year of self-employment. Freddie says the lender should provide “a written analysis justifying the determination of stability and sufficient supporting documentation.” Freddie Mac also says the lender should evaluate the acceptance of your company’s products and services in the marketplace. What!?

No lender wants to go up against Fannie Mae and Freddie Mac to argue that your business products are needed in the marketplace. They would rather just deny your loan.

Fannie Mae’s new, better definition will allow many lenders to confidently approve your self-employment without worrying about penalties from Fannie or Freddie after loan closing.

When applying, make sure your lender has your loan earmarked for Fannie Mae, not Freddie Mac.

It’s Important To Start Your Business Before January 1

As this is written in July 2024, it’s important that you start your business before January 1, 2025 if you want to apply for a mortgage in early 2026. The same principle is true every year.

You need to show a full 12 months of self-employed income on your tax return.

Tax returns reflect income from January 1 to December 31. So if you start your business in June, you’ll have to work 18 months before you can show a full calendar year’s income on your tax returns.

June to June doesn’t count as 12 months of self-employed income, unfortunately.

The reason is that lenders need federally-reviewed proof of income. The only source is a signed tax return that has been recorded with the IRS. A CPA’s profit and loss statement won’t cut it, or bank statements showing income (though there are bank statement loans that can help with that).

If you’re ready, start your business before the calendar year begins.

Other Options for One Year of Self-Employment

Luckily, conventional loans aren’t the only game in town. Other options exist. Generally, though, you need at least 12 months of self-employment, though perhaps not one full calendar year.

FHA and USDA loans: These might be more lenient about income and experience from your prior full-time role if you have one year of self-employment.

Bank statement loans: Some lenders offer programs accepting 12 months of bank statements to prove income and require only one year of self-employment.

Hard money: Hard money loans are a great option for someone with hard-to-document or new self-employed income. Rates are high, and loan terms can be as short as 12-24 months, meaning you have to come up with other financing quickly. Though these loans are most often reserved for investment properties, some lenders will lend on an owner-occupied home.

No-income-verification loans: The ability to repay is based solely on your credit and large reserves. For instance, someone with a 740 credit score and $2 million in assets after closing may be approved without income verification.

You Can Buy a Home With One Year of Self-Employment

Fannie Mae’s October 2023 guideline change has made it easier to qualify with one year of self-employment because the agency has defined exactly what you and your lender need to document.

If you match the criteria above or just want to explore non-conventional loan options, it’s worth applying.