The Mortgagee must analyze the borrower’s tax returns to determine gross self-employment income. Requirements for analyzing self-employment documentation are found in Handbook 4000.1 II.A Appendix 2.0 - Analyzing IRS Forms. The Mortgagee must calculate gross self-employment income by using the lesser of:
• the average gross self-employment income earned over the previous two years; or
• the average gross self-employment income earned over the previous one year.
Required Documentation
The Mortgagee must obtain complete individual federal income tax returns for the most recent two years, including all schedules. The Mortgagee must obtain the Borrower’s business tax returns for the most recent two years unless the following criteria are met:
• individual federal income tax returns show increasing Self-Employment Income over the past two years;
• funds to close are not coming from business accounts; and
• the Mortgage to be insured is not a cash-out refinance.
In lieu of signed individual or business tax returns from the Borrower, the Mortgagee may obtain a signed IRS Form 4506, Request for Copy of Tax Return, IRS Form 4506-C, IVES Request for Transcript of Tax Return, or IRS Form 8821, Tax Information Authorization, and tax transcripts directly from the IRS.
The Mortgagee must obtain a year-to-date Profit and Loss (P&L) statement and balance sheet if more than a calendar quarter has elapsed since the date of the most recent calendar or fiscal year-end tax period. A balance sheet is not required for self-employed Borrowers filing Schedule C income.
For loans receiving a TOTAL Scorecard Accept/Eligible recommendation refer to the self-employment income requirements in Handbook 4000.1 II.A.4.c.x.
For loans that must be manually underwritten, refer to the self-employment income requirements in Handbook 4000.1 II.A.5.b.x.
Handbook 4000.1 is available at https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh