If W-2 income is how you qualify, your tax returns often never enter the picture, and a secondary side-business loss usually does not either. When your qualifying income is salary or hourly W-2 pay, nobody on the loan is self-employed in a way that requires returns, and you do not own rental property, the standard documentation is a current pay stub plus W-2s. The 1040 typically is not required at all. That is following the guidelines as written, no more and no less; lenders gather the documentation the guidelines call for. Fannie Mae goes a step further. When you qualify using only non-self-employment income and the side business is a secondary, separate source, the lender does not have to evaluate that business, so a loss from it does not have to be deducted from your income. There is no dollar threshold in the guideline; the treatment turns on the business being secondary, not on the loss being small. One catch worth knowing: any business debt you are personally obligated on still counts in your debt-to-income ratio, even when the business itself gets set aside. Requirements also vary by loan program, so confirm what documentation applies to your specific file with whoever is handling your loan before you assume anything about how the loss is treated.