Part of the FHA loans in Arizona guide, where every rule on this page is cited and dated.
You went out on your own last year and you want to buy. The answer you have been given is to wait until you have two years of returns.
That is the default, not the rule. There is an exception, it turns on documented experience in the same line of work, and it is routinely missed because claiming it takes more work than quoting a waiting period.
The requirement
How your income gets calculated either way
FHA analyzes self-employment income much as other programs do: from filed returns, not from revenue and not from your profit and loss.
- Schedule C: net profit, plus certain add-backs including depreciation and business use of home, minus non-recurring income.
- 1120S and K-1: your W-2 wage from the entity counts. K-1 ordinary income counts where distributions are documented and the business has liquidity to keep paying them.
- 1065 and K-1: the same, with guaranteed payments included.
- Schedule E: rental net with allowable add-backs, minus the full housing payment on each property.
The arithmetic nobody enjoys: every dollar of aggressive deduction saves tax at your marginal rate and costs several dollars of qualifying income. And a declining second year generally becomes your qualifying figure rather than the average of the two.
See Business Owner Write-Offs and Your Mortgage.
The exception, and what claiming it actually requires
The heart of it is prior experience in the same line of work. Someone who spent years as an employee in an industry and then started their own firm in that industry is a materially different risk from someone who changed careers entirely. The income has continuity even though the tax treatment changed.
An underwriter can only credit a history they can see, so this is a documentation exercise:
- W-2s from the prior employment in the same field.
- Written verification of that employment, with dates and your role.
- Licenses or certifications held continuously through the transition.
- Evidence the business is stable or growing: year-to-date profit and loss, business bank statements, the trajectory they show.
- Client relationships that carried over, where they did. A borrower now invoicing clients they previously served as an employee has continuity worth documenting explicitly.
- A resume that the documents support, rather than a narrative they do not.
The strongest version of this case is someone who was a W-2 employee of a firm and now does the same work through their own entity for some of the same clients. That is not a new business in any economic sense, and documented properly it reads that way to an underwriter.
See 1099 Contractor and Gig Income and Recently Self-Employed.
The mistake to avoid right now, before you file
If you are in your first or second year of self-employment and intend to buy, get your CPA and your lender in one conversation before the return is filed.
A return prepared purely to minimize tax can cost you the house, and once it is filed it is filed. That does not mean overstating income. It means understanding, in dollars of purchasing power, what a given deduction costs you, and deciding knowingly. Sometimes the deduction is worth more than the house. Frequently it is not, and almost nobody runs the comparison.
Expect a manual underwrite, and prepare for it
A short self-employment history frequently routes a file to manual underwriting, where ratio limits tighten and compensating factors matter.
For a self-employed borrower that means reserves and housing history become your argument. Two years of documented on-time rent and real cash after closing are the two most persuasive things you can put in front of a manual underwriter. See What a Manual Underwrite Is.
One specific caution: money sitting in a business operating account is not automatically counted as your personal reserves, and moving it out has tax consequences your CPA should see first.
If FHA does not work yet
FHA is not the only path for a self-employed buyer, and in some cases it is not the best one. The alternatives do not look at your returns the same way, or at all:
Bank statement programs. Twelve or twenty four months of deposits with an expense factor applied by business type, internal transfers stripped out. Twelve months is something a one-year-old business has. See How Bank Statement Income Is Calculated, 12 vs 24 Month Bank Statements and Expense Factors by Business Type.
Profit and loss programs. A CPA-prepared profit and loss, sometimes with supporting statements. See P&L and WVOE Loans.
Asset depletion, where qualifying income is derived from verified liquid assets rather than earnings. See Asset Depletion and Asset Qualifier Loans.
No-ratio, where no debt-to-income test is applied at all and credit, assets, reserves and the property carry the file.
These price differently than FHA and are not shortcuts around qualifying. But a self-employed borrower told "come back in a year" by a bank has frequently been told the bank's answer rather than the market's. See One Year of Self-Employment.
What to do
- Separate your business and personal banking today, if you have not. This single habit determines whether a bank statement program will work for you in twelve months.
- Gather the evidence of your prior experience in the same field, now.
- Ask your lender specifically whether the one-year exception applies to your facts, and what documentation they would need.
- Ask for both analyses: the FHA calculation and a bank statement calculation, side by side, so you can see which produces the better approval.
- Get your CPA and your lender together before you file.
- Build reserves and document your rent history.
- Get fully underwritten rather than pre-qualified. On a file like yours a calculator number is meaningless. See Pre-Qualified, Pre-Approved, Underwritten.
Why bring this file to us
- We quote the handbook with the section and the date, not from memory. Every guideline on this site carries its citation and when it was last verified, and says so when it is getting old.
- We tell you the overlay, not just the rule. The published floor and what investors actually do are two different numbers, and only one of them decides your file.
- Broker model. When one investor's overlay is the obstacle, we move the file rather than tell you no.
- You talk to the principal. Ricky Khamis is President of EPiQ Lending, NMLS #173141, lending in Arizona since 1999 and a 2025 Presidents Club Winner at CMG Home Loans. Direct line: (480) 999-9842.
EPiQ Lending is NMLS #1936984, at 7975 N. Hayden Road, Suite A-101 in Scottsdale. Verify all of it before you trust any of it: Ricky's EPiQ Lending profile, the Scottsdale branch, and the license itself at NMLS Consumer Access. Hold every lender to that standard, including us.
Call before you shop, not after you are in contract. Most of what goes wrong in an FHA file was decidable in week one.
Equal Housing Opportunity. This is general information, not a commitment to lend or an offer to extend credit. FHA is a mortgage insurance program administered by the Department of Housing and Urban Development; loans are made by approved lenders, not by HUD or FHA. Guideline requirements are set out in HUD Handbook 4000.1 and change over time, and individual investors frequently impose requirements stricter than the published minimums. Nothing here is a substitute for the current handbook or for an underwriting decision on your specific file. Rates, terms and program guidelines change and depend on credit approval, property appraisal and other qualifying factors. Not all applicants will qualify. This is not legal or tax advice.
Looking at a specific home? Send me the address and I will run the numbers: rickykhamis.com/analyze
