# How to check self-employed income and Form 1084 in QC

Updated September 26, 2026

Under Fannie Mae's rules, a borrower with a 25% or greater ownership interest in a business is self-employed. Confirm the history and the returns, then rebuild the cash flow from the returns yourself: add back non-cash and nonrecurring items, deduct nonrecurring income, and test any K-1 income against distributions or liquidity.

## Key numbers

- **25%** or greater ownership interest makes a borrower self-employed under Fannie Mae
- **2 years** of history generally required; 12 months can qualify with documented prior income (B3-3.5-01)
- **120 days** before the note date to verify the business exists (B3-3.1-04)

## Check the citation numbering

Check your checklist's citations first. The current self-employment overview is B3-3.5-01. Use the current section numbers below rather than an older checklist's numbering.

## Confirm the history

Fannie "generally requires" two years. B3-3.5-01 accepts less when the most recent signed returns show 12 months from the current business and the file documents prior income at the same or a greater level, in a field with the same products or services or an occupation with similar responsibilities.

The lender must also give "careful consideration" to the borrower's experience and the debt the business has taken on. That is judgment, not a numeric test, so look for the underwriter's written rationale.

## Check the returns

The default is two years of signed personal returns (and business returns in some cases) with all schedules, or IRS transcripts that include the schedules. B3-3.5-01 allows two exceptions:

- One year of returns, when the business has existed five years (per the Form 1003), the borrower has held 25% or more for five consecutive years, and Form 1084 or an equivalent is in the file. Test each business separately.
- No business returns, with two years of signed personal returns, personal funds for the down payment, closing costs and reserves, five years in the same business, and self-employment income that increased over the two years.

## Find the written analysis

A written cash flow analysis of personal income is required: Form 1084, an equivalent form, an approved vendor tool, or Income Calculator. Unless business returns were waived, the file also needs a business trend analysis (Form 1088 or comparable) tracking gross income, expenses and taxable income year to year.

## Rebuild the cash flow

Recompute from the returns rather than re-adding the lender's form. The adjustments depend on the return:

| Return | Add back | Deduct | Source |
|---|---|---|---|
| Schedule C | Depreciation, depletion, business use of a home, amortization, casualty losses | Nonrecurring income, "including any exclusion for meals and entertainment expenses" | B3-3.6-03 |
| Form 1065 and 1120S | Depreciation, depletion, amortization, casualty losses, other nonrecurring losses | Travel and meals exclusion; nonrecurring income; mortgages, notes or bonds payable in less than one year, unless they are lines of credit, roll over regularly, or are covered by liquid assets | B3-3.7-01, B3-3.7-02 |
| Form 1120 | The above, plus net operating losses | The above, plus tax liability and dividends | B3-3.7-03 |
| Form 1040 | Nonrecurring losses | Nonrecurring income | B3-3.6-01, B3-3.6-02 |

Corporate earnings on a Form 1120 are usable only if the borrower owns 100% of the business.

[Form 1084 and its instructions](https://singlefamily.fanniemae.com/media/7746/display) are available as an eight-page PDF dated June 2019, verified September 26, 2026. Check the current Selling Guide alongside the worksheet; the guide citations above identify the applicable requirements.

## Test the K-1 income

K-1 ordinary income and net rental income count only if the file documents "a documented, stable history" of cash distributions consistent with the income used, or business liquidity adequate to support the withdrawal. Guaranteed payments count after a two-year history. That's B3-3.6-07.

The lender picks the liquidity test: the quick ratio for inventory-heavy businesses, the current ratio for others. A result of one or greater "is generally sufficient," and any other method needs a documented rationale. The borrower's share follows ending capital for a partnership and stock ownership for an S corporation.

## Read the trend

Partnerships, S corporations and corporations must show stable income and positive sales and earnings trends, or "business income cannot be used to qualify the borrower" (B3-3.7-01 through B3-3.7-03). For any self-employed borrower, focus on trends and leave out income that is not stable or likely to continue.

No topic sets a decline threshold or an averaging period. That is the lender's call, so check that the written analysis explains the trend and the figure chosen.

## Check the P&L and the business

A P&L, audited or unaudited, can support the judgment that income is stable and will continue. Most businesses don't need a year-to-date P&L, but B3-3.7-04 lets the lender require one if the application is dated more than 120 days after the business's tax year ended.

The business's existence must be verified within 120 calendar days before the note date, through a third party or a phone listing and address (B3-3.1-04).

## Worked example

Illustrative numbers. A sole proprietor files Schedule C and provides two years of signed returns.

| Line | Year 1 | Year 2 |
|---|---|---|
| Schedule C net profit | $62,000 | $68,000 |
| + Depreciation | 7,500 | 8,000 |
| + Casualty loss (one-time) | 0 | 1,200 |
| + Business use of home | 2,400 | 2,400 |
| − Meals exclusion | (900) | (1,000) |
| − Nonrecurring other income | 0 | (1,600) |
| Adjusted cash flow | $71,000 | $77,000 |

The trend is up about 8.5%. A 24-month average is $148,000 ÷ 24 = $6,166.67 a month; Year 2 alone gives $6,416.67. The Guide doesn't fix the averaging period, so confirm which one the underwriter used and that the analysis supports it. Under the one-year option only Year 2 exists, and you need the five-year business and ownership evidence.

The borrower also owns 40% of an S corporation. The K-1 shows $30,000 of ordinary income but only $12,000 of distributions, so liquidity must carry it. Current assets are $180,000 and current liabilities $120,000, a current ratio of 1.5. If $90,000 of those assets were inventory, the quick ratio would be 0.75, and the K-1 income would need another documented method.

## Where Freddie Mac differs

Freddie's Section 5304.1 accepts a short history when the borrower has a combined two-year history with a prior job in the same or a similar occupation, a written analysis, and returns showing at least one year of self-employment income. One year of returns is enough after at least five years self-employed in the same business (Streamlined Accept and Standard documentation levels).

It is stricter on what counts. K-1 cash distributions "may not be used as qualifying income," though they can show liquidity and access. Financial statements "may not be used for the calculation of stable monthly income (unless audited)." The worksheet is Form 91 or an equivalent, and a significant increase or decrease must be justified as likely to continue for three years.

The lender remains responsible for the income decision.

## FAQ

**Is Form 1084 required?**
A written cash flow analysis is required. Form 1084, an equivalent form, an approved vendor tool, or Income Calculator all qualify (B3-3.5-01).

**Are K-1 distributions income?**
Fannie counts K-1 ordinary income, and a distribution history is one way to show it is available (B3-3.6-07). Freddie says distributions "may not be used as qualifying income" (5304.1).

**Must a P&L be in the file?**
Usually not. The lender may require one if the application is more than 120 days after the tax year ended (B3-3.7-04).

## Sources

- Fannie Mae Selling Guide, published September 2, 2026: https://selling-guide.fanniemae.com/
- B3-3.5-01, Underwriting Factors and Documentation for a Self-Employed Borrower (12/13/2023): https://selling-guide.fanniemae.com/sel/b3-3.5-01/underwriting-factors-and-documentation-self-employed-borrower
- B3-3.6-01, General Information on Analyzing Individual Tax Returns (06/05/2019): https://selling-guide.fanniemae.com/sel/b3-3.6-01/general-information-analyzing-individual-tax-returns
- B3-3.6-02, Income Reported on IRS Form 1040 (05/15/2012): https://selling-guide.fanniemae.com/sel/b3-3.6-02/income-reported-irs-form-1040
- B3-3.6-03, Income or Loss Reported on IRS Form 1040, Schedule C (04/01/2009): https://selling-guide.fanniemae.com/sel/b3-3.6-03/income-or-loss-reported-irs-form-1040-schedule-c
- B3-3.6-07, Income or Loss Reported on IRS Form 1065 or IRS Form 1120S, Schedule K-1 (05/07/2025): https://selling-guide.fanniemae.com/sel/b3-3.6-07/income-or-loss-reported-irs-form-1065-or-irs-form-1120s-schedule-k-1
- B3-3.7-01, Analyzing Partnership Returns for a Partnership or LLC (02/07/2024): https://selling-guide.fanniemae.com/sel/b3-3.7-01/analyzing-partnership-returns-partnership-or-llc
- B3-3.7-02, Analyzing Returns for an S Corporation (02/07/2024): https://selling-guide.fanniemae.com/sel/b3-3.7-02/analyzing-returns-s-corporation
- B3-3.7-03, Analyzing Returns for a Corporation (06/05/2019): https://selling-guide.fanniemae.com/sel/b3-3.7-03/analyzing-returns-corporation
- B3-3.7-04, Analyzing Profit and Loss Statements (04/01/2009): https://selling-guide.fanniemae.com/sel/b3-3.7-04/analyzing-profit-and-loss-statements
- B3-3.1-04, Verbal Verification of Employment (03/04/2026): https://selling-guide.fanniemae.com/sel/b3-3.1-04/verbal-verification-employment
- Form 1084, Cash Flow Analysis and instructions (June 2019; verified September 26, 2026): https://singlefamily.fanniemae.com/media/7746/display
- Freddie Mac Single-Family Seller/Servicer Guide, Section 5304.1 (06/03/26), from the Guide PDF current as of Bulletin 2026-I, published September 16, 2026: https://guide.freddiemac.com/app/guide/section/5304.1

This guide summarizes agency requirements as of the date above. It is not legal advice.