How to Complete the Fannie Mae Cash Flow Analysis (Form 1084)

Fannie Mae Form 1084 converts a self-employed borrower’s tax returns into a single monthly income figure for loan qualification, and completing it comes down to matching specific lines from each tax return to the corresponding entity section on the worksheet, adding back non-cash deductions, and subtracting non-recurring income. The current version of the worksheet is available on Fannie Mae’s single-family site.¹ The form has separate sections for sole proprietorships, partnerships, S-corporations, and C-corporations, and the mechanics differ enough between them that working from the wrong template will produce the wrong number.

The 25-percent ownership rule sets the perimeter. Fannie Mae treats any borrower with a 25-percent or greater stake in a business as self-employed and requires the full cash-flow analysis, even if that borrower also draws a W-2 salary from the same business.² A 20-percent owner is documented differently and does not need Form 1084 for that income.

Documents to Gather Before You Start

Fannie Mae generally requires two years of signed federal returns, both personal and business, with every schedule attached.² Complete IRS transcripts are an acceptable substitute. What you need depends on the entity:

Sole proprietorship: Form 1040 with Schedule C.
Partnership: Form 1065 and the borrower’s Schedule K-1.
S-corporation: Form 1120S and the borrower’s Schedule K-1.
C-corporation: Form 1120.

Pull the borrower’s Schedules B, D, E, and F from the personal return if any apply. For each business return, confirm that Schedule L (balance sheet) and Schedule M-1 (reconciliation) are included; Form 1084 draws from both.

Schedule C: Sole Proprietorship Income

Enter the net profit or loss from Schedule C for each year. That figure is the starting point, but it understates cash available to the borrower because several deductions on the return did not require cash to leave the business.

Add back the following items:³

Depreciation from Schedule C, line 13.
Depletion.
Amortization and casualty losses.
Business use of home from Schedule C, line 30, because the borrower’s housing costs are already captured in the proposed mortgage payment.

If the borrower uses the standard mileage rate rather than actual vehicle expenses, capture the depreciation embedded in those miles. Multiply the business miles reported in Part IV of Schedule C (or on Form 4562) by the depreciation rate per mile in effect for that year, and add the result back.¹

On the subtraction side, remove any income that is not consistent and recurring. A one-time insurance payout or an unusual revenue spike the borrower cannot repeat should come out.¹

Schedules D, E, and F on the Personal Return

Form 1084 has fields for capital gains from Schedule D, but recurring capital gains rarely qualify without a documented two-year pattern and a reasonable basis for expecting the gains to continue. One-time sales stay out.

Schedule E rental income is not calculated on Form 1084 itself. Fannie Mae directs you to the dedicated rental worksheets: Form 1037 for individual rental properties and Form 1038 for two-to-four-unit properties.¹ Form 1084 captures royalties and depletion from Schedule E, nothing more.

Schedule F farm income follows the Schedule C pattern. Start with net farm profit or loss, add back depreciation, amortization, depletion, and casualty losses, and subtract any non-recurring income.

Partnership Income From Form 1065

Start with the borrower’s ordinary business income or loss from the K-1. Then layer in adjustments from the partnership’s Form 1065, prorated to the borrower’s ownership percentage.

Add back the borrower’s share of depreciation, depletion, and amortization from the partnership return. Add back guaranteed payments as well, provided the borrower has a two-year history of receiving them.¹ Guaranteed payments show up on both the K-1 and the borrower’s 1040, so trace them carefully to avoid double-counting.

Subtract non-recurring other income and the borrower’s proportionate share of mortgages or notes payable in less than one year, taken from the end-of-year column on Schedule L of Form 1065. That short-term-debt subtraction is not required if the obligations regularly roll over or the business has enough liquid assets to cover them.¹

The step that catches people out: a borrower’s share of partnership earnings only counts as qualifying income if the income was actually distributed, or the business has adequate liquidity to support a withdrawal.¹ A K-1 showing $150,000 in ordinary income is worthless if the partnership retained everything and the borrower never received a distribution. Verify with bank statements or partnership distribution records before relying on the figure.

S-Corporation Income From Form 1120S

Begin with the borrower’s share of ordinary business income from the K-1. The same distribution-or-liquidity requirement applies: the earnings must have reached the borrower, or the company must be liquid enough to support a withdrawal.¹

Add back the borrower’s share of depreciation, depletion, amortization, and casualty losses from the 1120S. Subtract the borrower’s share of short-term debt from Schedule L under the same conditions that apply to partnerships.

The adjustment unique to S-corporations (and C-corporations) is the non-deductible portion of travel, meals, and entertainment. Meals are generally 50-percent deductible and entertainment is not deductible at all; the excluded portion appears on Schedule M-1. Subtract that excluded amount from business cash flow, because the business actually spent the money even though it could not fully deduct it.¹ The tax return already excluded the expense from income, so cash flow appears higher than it actually is until you pull the excluded portion back out.

C-Corporation Income From Form 1120

C-corporations require the most scrutiny, and one threshold is absolute: only a borrower who owns 100 percent of the corporation can use corporate earnings as qualifying income on Form 1084.⁴ A 60-percent shareholder cannot count any of the corporate income.

Start with taxable income before net operating loss deductions and special deductions. Add back:⁴

Depreciation, depletion, and amortization.
Casualty losses.
Net operating losses carried over from prior years.
Other special deductions that are not consistent and recurring.

Then subtract:

Non-deductible travel and meals from Schedule M-1.
Federal tax liability, because unlike pass-through entities, the C-corporation pays its own taxes.
Dividends paid to the borrower. Dividends appear on the corporation’s Schedule M-2 and on the borrower’s personal Schedule B, so leaving them in would double-count. Subtract the full distribution.¹
Mortgages or notes payable in less than one year from Schedule L, unless they regularly roll over or liquid assets cover them.

After the arithmetic, evaluate the corporation itself. Three conditions must be met before the income can be used: income must be stable and consistent, sales and earnings trends must be positive, and the business must have adequate liquidity to support the borrower’s withdrawals without severe negative effects.⁴ Review Schedule L to confirm the company is not funding owner draws by burning through cash reserves or piling on short-term debt.

Producing the Monthly Qualifying Income

Once every entity section is complete, Form 1084 totals the adjusted income across all sources. Divide the total by the number of months in the analysis period, typically 24 for two years of returns, to produce the monthly qualifying income. That figure feeds into the debt-to-income ratio for the loan.

W-2 wages the borrower draws from the same business are documented separately and are not entered on Form 1084. The W-2 income and the Form 1084 cash flow are combined later in the overall underwriting analysis.

Every entry on the completed form should be traceable to a specific line on the underlying return. Fannie Mae requires a copy of the written analysis in the permanent loan file.² If a reviewer cannot trace an entry back to a tax document, expect a condition or a rejection.

When One Year of Returns Is Enough

Two years is standard. Fannie Mae allows a single year of personal and business returns when all of the following are true:²

The business has existed for at least five years, as shown on Form 1003.
The borrower has held a 25-percent or greater ownership share for the past five consecutive years.
The business tax return (or, for a sole proprietorship, the individual return and supporting documentation) supports the information on the loan application.

Each business is measured against the five-year benchmark independently. A borrower with a ten-year consulting practice and a three-year restaurant needs one year of returns for the consulting income and two years for the restaurant.

A narrower exception waives business returns entirely, while still requiring two years of personal returns, when the borrower pays the down payment and closing costs from personal funds, has been self-employed in the same business for at least five years, and shows increasing self-employment income from that business across the two-year period.²

Trending Analysis for Declining Income

Filling the numbers in is half the exercise. Fannie Mae expects lenders to evaluate year-to-year trends in gross income, expenses, and taxable income and determine whether the direction is favorable.² A business that earned $200,000 in year one and $140,000 in year two does not simply average to $170,000; the downward slope raises the question of whether the next year drops further.

Stable or increasing income supports a straight two-year average. Declining income requires the underwriter to determine whether the drop reflects a temporary event or a structural deterioration. If the decline cannot be satisfactorily explained and the trend appears likely to continue, using the lower year’s income (or declining to count the income at all) is the safer course. The Selling Guide does not prescribe a formula for declining trends, so the written analysis needs to document the reasoning well enough to survive quality-control review.

Pass-through income deserves extra scrutiny at this stage. A K-1 showing strong ordinary income means little if gross revenue is shrinking year over year and the owner is cutting expenses to hold up short-term profitability. Comparing the ratio of expenses to gross income across the two years reveals whether the margin is sustainable.

Errors That Trigger Underwriting Conditions

A handful of mistakes surface repeatedly:

Counting pass-through income without verifying distributions. Without bank statements, distribution records, or a balance sheet showing the company can support a withdrawal, K-1 earnings cannot be used.
Forgetting the non-deductible meals and entertainment subtraction on Schedule M-1. Skipping it inflates the qualifying income.
Using C-corporation income for a borrower who owns less than 100 percent. Partial owners cannot use any corporate earnings on Form 1084.
Missing the business-use-of-home add-back on Schedule C, line 30. It sits below the net-profit line and is easy to overlook.
Failing to document the trending analysis. Accurate numbers without a written explanation of year-over-year changes still leave the file short of what Fannie Mae requires.

1
Fannie Mae. Cash Flow Analysis (Form 1084)
2
Fannie Mae. Underwriting Factors and Documentation for a Self-Employed Borrower
3
Fannie Mae. Income or Loss Reported on IRS Form 1040, Schedule C
4
Fannie Mae. Analyzing Returns for a Corporation