Fannie Mae Profit and Loss Statement Requirements for Self-Employed Borrowers

If you're self-employed and applying for a mortgage, there's a good chance you've come across a confusing piece of advice: a Fannie Mae audited profit and loss statement is a mandatory requirement. Not exactly.

Fannie Mae does not automatically require every self-employed borrower to provide an audited P&L. An audited or unaudited profit and loss statement may be used when a lender needs a clearer picture of how the business is performing and whether that income is likely to continue. But the exact documentation depends on the loan file, the business, and what the lender needs to verify.

That's an important distinction. A self-employed mortgage P&L isn't based on the revenue your business brings in each month. The lender has to determine how much of that income can reasonably be used for mortgage qualification. Tax returns, business returns, schedules, ownership, distributions, business liquidity, and current financial performance can all come into play.

So, what exactly are the Fannie Mae profit and loss statement requirements? And when might a lender ask you to provide one? Let's get into it.

Does Fannie Mae Require an Audited Profit and Loss Statement?

No. There isn't a blanket Fannie Mae audited profit and loss rule saying every self-employed borrower needs an audited P&L. Under Fannie Mae's guidance, a lender can use an audited or unaudited profit and loss statement to support its analysis of a self-employed borrower's income, including its stability and likelihood of continuance.

An audit is a specific accounting process. An accountant examines the financial statements and provides a level of assurance based on that examination. An unaudited P&L is different. It can still show the company's income and expenses, but it hasn't gone through the same audit process.

So why might a borrower still be told to get an audited statement?

Sometimes the request comes from the lender rather than Fannie Mae itself. A lender may have additional underwriting requirements, commonly called overlays, or an underwriter may need more documentation because something in the application requires clarification.

If you're given a P&L condition, it's reasonable to ask where it comes from. Is it a part of Fannie Mae P&L requirements? A lender policy? Or a condition specific to your application? Those aren't necessarily the same thing.

Audited, Unaudited, CPA-Prepared and P&L-Only Are Different

Mortgage terminology can get messy here because these terms are sometimes used as if they mean the same thing. They don't.

A P&L-only mortgage is not a Fannie Mae mortgage. Some non-QM programs allow lenders to evaluate self-employed income using alternative documentation, including P&Ls or business bank statements. Those programs operate under different rules.

So if you see a lender advertising a mortgage based primarily on a P&L, don't assume it's another version of a conventional Fannie Mae loan. It isn't.

What a P&L Does and When a Lender May Request One

A profit and loss statement is useful because tax returns tell the lender what happened during a previous tax period, while a current P&L can show what is happening in the business more recently. That doesn't mean every borrower needs one.

Fannie Mae states that a year-to-date profit and loss statement mortgage is not required for most businesses. However, when more than 120 days have passed since the end of the business's tax year, the lender may request a year-to-date P&L if it needs current information to determine whether the borrower's self-employment income remains stable and likely to continue.

There can be other reasons for additional documentation, too.

For example, an underwriter might want a better understanding of a major change in income, the use of business funds for the transaction, or a noticeable difference between the income shown on tax returns and the business's more recent performance.

The important thing is not to treat a P&L as a magic document that proves you're earning a certain amount. It is one part of the lender's overall income review.

Tax Returns, Transcripts, and Your Self-Employment History

If you're self-employed, your tax returns are still a major part of the mortgage process. A current P&L doesn't normally replace them.

Depending on your business structure and the requirements of your loan file, the lender may review personal tax returns, business returns, applicable schedules, and IRS tax transcripts. Form 4506-C may also be involved when the lender needs authorization to obtain tax information.

The specific documents vary, so there's no point assembling a mountain of paperwork before you know what applies to your situation. Your self-employment history matters, too.

Fannie Mae generally looks for a two-year history of earnings when evaluating self-employed income. There is, however, a limited path for borrowers with less than two years of self-employment.

In qualifying situations, the most recent tax returns can show a full 12 months of income from the current business, while documented prior income from the same field or a similar occupation can help establish the necessary history.

There are also circumstances where Fannie Mae permits one year of documentation or a waiver of business tax returns when specific conditions are met. These aren't automatic exceptions, though. The details of the borrower's business, ownership, and income have to fit the applicable requirements.

What Documents Do You Need Based on Your Business Structure?

The documents involved in a self-employed mortgage depend heavily on how your business is set up. A sole proprietor has a different tax filing structure from an S corporation. A partnership has different income considerations from a C corporation. And owning 25% of a business can put you into the self-employed borrower category even if you don't think of yourself as a traditional business owner.

Fannie Mae generally considers a borrower self-employed when they own 25% or more of a business.

Here's a simplified look at the documentation that may come into play:

The table is a starting point, not a universal document list. Your exact requirements can depend on your ownership interest, tax treatment, DU findings, and lender review.

How Is Self-Employed Income Calculated?

A lender doesn't simply look at your gross business revenue and use that number to qualify you. Gross receipts don't tell the whole story. A business might generate $300,000 in revenue but have substantial operating expenses.

The lender instead performs a cash-flow analysis to determine the income that can reasonably be relied upon for mortgage qualification. Fannie Mae allows lenders to use Cash Flow Analysis Form 1084, another analysis that follows the same principles, an approved tool, or its Income Calculator.

For someone reporting business income on Schedule C, the analysis generally starts with the reported net profit or loss. From there, certain permitted adjustments can be made. Some recurring non-cash expenses may be added back, including items such as:

• Depreciation
• Depletion
• Business use of home
• Amortization
• Certain casualty losses

Nonrecurring income that isn't expected to continue may need to be removed from the calculation. The calculation becomes more nuanced with partnerships and corporations.

A borrower's share of business income doesn't necessarily mean that the borrower has access to that entire amount as personal income. The lender may need to look at ownership percentage, distributions, W-2 wages, and the company's liquidity.

For instance, someone may show significant income on a Schedule K-1, but if the business doesn't have enough cash to support distributions, the lender may need to take that into consideration. That's why self-employed borrower income calculation isn't a one-line formula.

What Happens When Income Is Declining?

Declining income doesn't automatically mean a mortgage application is dead. But it can trigger additional questions.

• An underwriter may look at things such as falling sales, shrinking profits, increasing expense ratios, or large year-over-year changes.
• Missing schedules or inconsistent current financial information can also make the file harder to evaluate.
• Business liquidity matters, particularly when the borrower owns a significant share of the company or wants to use business funds for the transaction.
• The lender's main concern is whether the income being used for qualification is stable and reasonably expected to continue.

That doesn't mean the underwriter simply averages two years of income every time. Nor does Fannie Mae have a universal rule saying the lower year's income must always be used. Context matters.

Maybe the business had a legitimate one-time expense. Maybe a major client left. Maybe revenue dipped temporarily but has since recovered. Whatever the reason, the lender needs documentation that supports how the income should be treated.

Don't try to manufacture a better-looking P&L or alter accurate financial records. If you believe something on your tax return is incorrect, talk to your tax professional and your lender about the proper way to address it.

Self-Employed Mortgage P&L Checklist

Before applying, it helps to have your basic financial records organized. You may need some or all of the following:

• Recent signed personal federal tax returns
• Applicable schedules, such as Schedule C or Schedule K-1
• Business tax returns, when required
• Form 1065 for partnerships
• Form 1120S for S corporations
• Form 1120 for C corporations
• W-2s if you're paying yourself wages
• IRS transcripts or authorization when requested
• A current or year-to-date profit and loss statement, if required
• Balance sheet, when applicable
• Business asset statements, when requested
• Documentation confirming that the business exists
• Explanations for significant changes in income or expenses

Don't assume you'll need every item on that list. The right move is to confirm the Fannie Mae profit and loss statement requirements in terms of documentation with your lender before spending time and money obtaining documents that may not be necessary.

What If Your Tax-Return Income Isn't Enough?

Self-employed people often claim legitimate deductions that reduce taxable income. That's perfectly normal from a tax perspective. Mortgage underwriting, however, has its own rules for determining qualifying cash flow.

If your tax returns don't support the loan amount you're seeking, producing a brand-new P&L doesn't erase the history reflected in those filed returns. If there's a genuine tax or accounting error, discuss it with your qualified professional. Don't change accurate records just to increase your mortgage-qualifying income.

There are other practical options worth discussing with a mortgage professional. Depending on your circumstances, you could look at a lower loan amount, consider a different timeline, or explore other conventional loans.

That's where alternative documentation can sometimes enter the conversation.

Truss Financial Group can help borrowers compare a conventional mortgage review with eligible alternatives, including bank statement loans or P&L-based non-QM programs. These are not Fannie Mae products, and they can have different rates, fees, down payment requirements, reserve requirements, and eligibility standards.

The right option depends on the actual numbers, not just the fact that you're self-employed. Request a mortgage review today!

Frequently Asked Questions

1. Does Fannie Mae require an audited profit and loss statement?

No. Fannie Mae allows lenders to use audited or unaudited P&Ls when appropriate. An audited P&L is not a universal requirement for every self-employed borrower.

2. Can a Fannie Mae P&L be unaudited or borrower-prepared?

An unaudited P&L may be used as part of the lender's analysis. Whether a particular format or preparation method is acceptable can depend on the lender and the circumstances of the loan.

3. When might a lender ask for a year-to-date P&L?

A year-to-date profit and loss statement mortgage isn't required for most businesses. More than 120 days after the end of the business tax year, however, a lender may request current financial information if it needs the P&L to evaluate income stability and continuance.

4. How current does a mortgage P&L need to be?

There isn't one universal freshness requirement that applies to every loan file. The lender's documentation needs can depend on when the application is made, the business's tax year, and the information already available.

5. Does a P&L replace tax returns for a Fannie Mae loan?

Generally, no. A P&L can support the income analysis, but it doesn't simply replace required tax returns, schedules, transcripts, or the lender's cash-flow analysis.

6. Does Fannie Mae require two years of self-employment?

Fannie Mae generally looks for a two-year earnings history. Certain borrowers with less than two years of self-employment can be considered when the applicable Fannie Mae profit and loss statement requirements are met, including documentation of current and comparable prior income.

7. How does a lender handle declining self-employment income?

The lender evaluates the trend and whether the income is stable and likely to continue. A decline doesn't automatically result in one specific calculation. The circumstances and supporting documentation matter.

8. Is a P&L-only mortgage a Fannie Mae loan?

No. A P&L-only mortgage is an alternative-documentation, generally non-QM product. It should not be confused with a conventional Fannie Mae mortgage.