Self-employed in Tennessee and ready to buy a first home

Start with an example: a Nashville session player

Let's make this real. Picture a guitarist who's been playing sessions and touring dates around Nashville as a sole proprietor for three years. Paid by the gig, files a Schedule C, writes off gear and a home studio. Example only:

FHA uses the lower of the two-year average or the most recent year. The average is $54,050 and the latest year is $56,300, so FHA counts $54,050. That's about $4,504 a month. At THDA's 45% debt-to-income cap, total monthly debts, the new house payment included, could run about $2,027.

Two things to notice. First, the add-backs helped: depreciation, depletion, amortization, casualty losses and business use of home on a Schedule C are all added back under FHA and Fannie Mae rules. Second, gross bookings never showed up. Lenders don't look at what clients paid you. They look at what's left.

A second example: an HVAC company with an S corporation

Now a Knoxville-area heating and air contractor who owns 100% of an S corporation. The lender reads the business return (Form 1120S) and the K-1 together. Under FHA, depreciation, depletion, amortization and one-time casualty losses are added back in proportion to ownership, and business debts due in under a year are subtracted.

If the loan ends up conventional, Fannie Mae counts S corporation income only if the owner actually took distributions matching the K-1, or the business has enough cash on hand. A current ratio or quick ratio of 1 or more is generally enough. Keep the business books tidy, because the lender may ask.

What goes in your folder

• Two years of signed personal tax returns with every schedule.
• Two years of business returns and K-1s if you own an S corporation, partnership or corporation. FHA can skip business returns when your personal returns show rising income and you're not using business funds to close.
• A year-to-date profit and loss statement if more than a calendar quarter has passed since your tax year ended. Schedule C filers under FHA don't need a balance sheet.
• IRS Form 4506-C, so the lender can pull transcripts to match your returns.
• Proof the business exists: a license, a website, a CPA letter. Freddie Mac wants this verified within 120 days of closing.
• Bank statements showing where your closing money is coming from.

How long do you need to be on your own?

Two years is the starting point. There are narrow ways to get there sooner:

• FHA accepts one to two years of self-employment if you worked at least two years before that in the same or a related line of work.
• Freddie Mac wants your self-employment plus a prior job in a similar field to add up to two years, with at least one year of self-employment on your tax returns.

So an HVAC tech who worked for a company for six years and went out on his own 18 months ago has a fair shot. A nurse who opened a bakery last year usually doesn't yet. VA and USDA self-employment rules weren't confirmed here, so your lender confirms those.

Watch out for a falling year. Under FHA, a drop of more than 20% sends the file to manual underwriting, where you'd need a good explanation and at least 12 months of stable or rising income.

Which programs fit a self-employed buyer

Homeownership for Heroes is tied to a job: a Tennessee full-time K-12 teacher or principal, law enforcement officer, firefighter, EMT, paramedic or dispatcher, or military service. Working for yourself in another field doesn't qualify you. A self-employed veteran does qualify, because service is what counts. Whether 1099 work in a listed role counts as being employed in it isn't spelled out, so a lender confirms.

Open to any line of work:

• THDA Great Choice Plus: the same down payment options as Heroes, without the 0.5% rate discount, under your county's income limit.
• The Housing Fund: a statewide repayable loan of $5,000 to $35,000 for buyers up to 120% of area median income.
• City programs in Memphis, Chattanooga and Murfreesboro, which go by income and location. Most depend on available funding. The full list is in the assistance directory.

Married to a teacher, deputy or firefighter?

This is one of the best setups there is. The spouse with the qualifying job makes the household eligible for Heroes. If that W-2 income covers the payment alone, the loan can be simpler, because the self-employed income may not need to be underwritten at all.

The catch is the income limit. THDA tests household income, so your business profit likely counts toward it even if it's not used to qualify. In Davidson and the surrounding counties the limit for three or more people is $162,540. In Knox County it's $119,255. Check your county on the income limits page, and let a THDA-approved lender confirm what counts. Both spouses also have to meet the first-time buyer rule unless you buy in a targeted area.

Before you change how you file

Every self-employed person hears the same tip: write off less for a year so your income looks bigger. Maybe. But talk to a CPA first, because you'd pay more tax to do it.

The other route is a bank-statement loan that qualifies you from deposits. Federal ability-to-repay rules allow bank records as income proof, but these loans are usually non-QM and priced above agency loans. THDA's help sits behind its own FHA, VA, USDA or Freddie Mac first mortgage, so a bank-statement loan generally can't be paired with it. For a lot of Tennessee buyers, a THDA loan with assistance beats a non-QM loan without it.

Your next three moves

1. Pull your last two returns and add back depreciation and business use of home to see your real number.
2. Get every borrower's credit to 640 or higher. Our credit guide explains why everyone counts.
3. Check your eligibility and ask for a lender who underwrites self-employed files often.

Things people ask