Freddie Mac’s tax return requirements apply mainly to self-employed borrowers, landlords, and people whose earnings come from commissions, capital gains, or royalties. If you earn a straightforward W-2 salary with no side business or rental property, your lender may never ask for a 1040. The requirements kick in when your income cannot be confirmed with a pay stub and an employer phone call.
Who Needs to Provide Tax Returns
The Freddie Mac Single-Family Seller/Servicer Guide treats anyone with a 25% or greater ownership stake in a business as self-employed, regardless of how that business is structured.1Freddie Mac. Guide Section 5304.1 Borrowers in that category must provide complete federal income tax returns so the lender can calculate actual earnings after business expenses, which is often very different from gross revenue.
Beyond self-employment, several other income types also trigger the requirement:
- Rental income. If you want to use income from investment properties or a multi-unit primary residence to qualify, you need Form 1040 with Schedule E for at least the most recent tax year.2Freddie Mac. Guide Section 5306.1
- Commission income at 25% or more of total employment income. Freddie Mac applies stricter documentation rules that include tax returns.3Freddie Mac. Guide Bulletin 2016-19A
- Capital gains and royalties. Tax returns establish that these sources are recurring and stable enough to count toward qualifying.4Freddie Mac. Guide Section 5305.1
When You Won’t Need Them
If your income comes entirely from a salaried or hourly W-2 job and you don’t own a business or rental property, Freddie Mac’s guidelines generally don’t require tax returns. The lender can verify earnings through recent pay stubs, W-2 forms, and an employment verification. Freddie Mac’s automated underwriting system, Loan Product Advisor, evaluates the overall risk profile and sets the documentation the lender must collect.5Freddie Mac. Loan Product Advisor Documentation Matrix
Lenders can always ask for more than Freddie Mac’s minimum. If W-2 income fluctuates significantly year to year, or the lender spots unreimbursed business expenses or other red flags, returns may still be requested.
How Many Years of Returns Are Required
The standard for self-employed borrowers is two years of complete federal income tax returns.1Freddie Mac. Guide Section 5304.1 Those two years let the lender average your income and check whether earnings are stable or trending downward. The analysis is documented on Freddie Mac’s Form 91 or a similar worksheet.
Some borrowers with well-established businesses may qualify with a single year of returns, depending on Loan Product Advisor findings and the strength of the overall file. This is not something you can simply request; the automated system determines whether reduced documentation is appropriate based on factors like credit score, assets, and loan-to-value.
Rental income requires at least the most recent year’s Form 1040 with Schedule E.2Freddie Mac. Guide Section 5306.1 If the property was purchased or converted to a rental partway through the year, the calculation is adjusted to reflect only the months of actual rental activity.
Timing Around the April 15 Deadline
The Guide ties document requirements to the IRS filing calendar.6Freddie Mac. Guide Section 5302.4 After April 15, lenders expect to see your return from the most recently completed tax year. Apply in June 2026 and your 2025 return should already be filed and in the loan file.
If you filed for an IRS extension, the lender can work with your prior year’s return until the extended deadline passes, but expect extra scrutiny. You may need to show that any taxes owed have been paid or are on an installment agreement, because an unpaid tax debt can become a lien that blocks closing.
Which Forms and Schedules Count as Complete
When Freddie Mac says complete tax returns, they mean every page of your signed Form 1040 with all applicable schedules. A missing schedule is one of the most common reasons underwriting stalls, and lenders will not move forward until the file is whole.
Personal Return Schedules
Which schedules you need depends on your income sources:7Freddie Mac. Form 91 – Income Calculations
- Schedule C for sole proprietors. Reports business profit or loss, with the lender starting from net profit before adjustments.
- Schedule E for rental properties and royalty income. For rentals, the lender applies a multi-step calculation rather than using the bottom-line number.
- Schedule F for farming income. Works like Schedule C but covers agricultural operations.
Business Returns for 25% Owners
If you own 25% or more of a business entity, your personal return alone isn’t enough. The lender also needs the business return to evaluate the company’s financial health and confirm it can keep paying you.1Freddie Mac. Guide Section 5304.1 The required form depends on how the business is organized:
- C-corporations: IRS Form 1120.
- S-corporations: IRS Form 1120-S, plus your Schedule K-1 showing your share of business income.
- Partnerships and LLCs taxed as partnerships: IRS Form 1065, plus your Schedule K-1.
The Schedule K-1 matters because it shows your specific ownership percentage and your allocated share of profits or losses.7Freddie Mac. Form 91 – Income Calculations For S-corporations and partnerships, the lender multiplies business-level figures by your ownership percentage to arrive at your share.
How the Numbers Turn Into Qualifying Income
Your qualifying income is almost never the gross revenue at the top of your Schedule C or business return. Lenders start with net income and make a series of adjustments that can work for or against you.
For a sole proprietor filing Schedule C, the process starts with net profit or loss, then adds back non-cash expenses that reduced your taxable income but did not actually cost you money during the year.7Freddie Mac. Form 91 – Income Calculations Depreciation is the most common add-back and can meaningfully increase your qualifying income. Depletion and amortization are added back as well. Meals and entertainment deductions come out of qualifying income, because Freddie Mac treats the full cost as a real business expense. One-time gains that inflated a particular year get removed, and short-term business debt (notes payable in less than a year) reduces qualifying income.
When two years of returns are provided, the lender averages the adjusted income across both years. Income trending upward is often taken at the lower of the two years or the average. Income trending downward is generally taken at the lower, more recent figure. A significant decline between years raises serious underwriting concerns and can result in a denial if the lender cannot document a clear reason for the drop along with evidence of recovery.
Rental Income
Rental income follows its own multi-step formula in Guide Section 5306.1.2Freddie Mac. Guide Section 5306.1 The lender starts with rents received on Schedule E, deducts operating expenses, and adds back items that did not represent actual out-of-pocket costs during the year. Depreciation, depletion, amortization, and documented one-time casualty losses are always added back. Insurance, mortgage interest, real estate taxes, and HOA dues may be added back if those costs are already counted in your monthly housing payment for debt-to-income purposes.
The resulting net figure is divided by 12, or by the number of months you owned the property if less than a full year, to produce a monthly number. That figure adds to qualifying income if positive or counts as a monthly liability if negative.
The Three-Year Continuity Requirement
Freddie Mac requires that all income used for qualifying be reasonably expected to continue for at least three years from the date of the mortgage.8Freddie Mac. Guide Section 5303.1 This applies to every income type, not just self-employment.
A business that has operated profitably for several years generally clears this hurdle. A business that started 18 months ago with volatile income is a harder case. The lender also reviews the business itself to confirm it has enough liquidity and financial strength to keep producing your income.7Freddie Mac. Form 91 – Income Calculations Thin margins, heavy debt, or declining revenue at the business level can undermine your personal income even if your K-1 looked fine last year.
IRS Transcript Verification
After collecting your returns, the lender verifies them independently through the IRS. You sign IRS Form 4506-C, which authorizes the lender to request transcripts of your filed returns through the IRS Income Verification Express Service.9Internal Revenue Service. Income Verification Express Service (IVES) The lender submits the authorization electronically and receives a summary of the key figures from your actual filing.
When the transcripts arrive, the lender compares them line by line against the returns you provided. Any discrepancy needs a written explanation, and significant mismatches can derail the loan.10Freddie Mac. Guide Section 5304.2 The most common issues are amended returns the borrower forgot to mention, income reported differently than what appears on the copy provided, or returns that simply have not been filed yet.
Transcripts can take several business days to arrive, and IRS processing backlogs occasionally cause longer delays. On a tight closing timeline, filing your taxes early and keeping clean records eliminates one of the most common bottlenecks in mortgage underwriting.