Qualify for a Mortgage with 1 Year Tax Returns
Best Self Employed Home Loan
Traditionally, mortgage lenders have required two years federal income tax returns in securing a mortgage for purchasing or refinancing real estate.
There's been changes to the way mortgage lenders underwrite mortgage loans. Borrowers may now get a mortgage with just one year of federal tax returns subject to approval conditions.
Benefits of a Home Loan with 1 Year of 1040's
** Use the most recent filed tax return to qualify
If you are a self-employed or W2 (salaried) borrower who earned much more in the recent year there is no need to average the previous year when you made less income.
2018 Income is $60,000
2019 income is $150,000
*** Use only 2019's income to qualify with 5-to-15-percent down payment or equity on refinances up to $1,500,000
IMPORTANT: Scroll to the bottom to see "Reasons Why You May Be Denied"
Freddie Mac and Fannie Mae are among the few lenders that may accept only one year of tax returns. The others being portfolio loan products through private client departments at asset management companies. Fannie and Freddie Mac's automated underwriting system will indicate to the mortgage company how many years of tax returns and the number of months of bank statements is needed.
If the results from automated underwriting just ask for one year of tax returns, which is your most recent, then you're all set to apply for today's attractive rates.
For most Fannie & Freddie loans, you will average the last two years of income. For the portfolio loan with a 20-percent down payment, only the last year of income is calculated.
Here's a couple more situations where this loan helps self-employed borrowers:
- A business that was recently established two years ago had high start-up expenses so the prior year's income was minimal or a complete wash, although the business was very profitable in the next year it filed tax returns.
- A salaried employee changes to self-employed 1099 but his/her duties are essentially the same.
Qualifying for a 1 Year Tax Return Mortgage
The maximum debt to income(DTI) ratios for a conventional loan is 50. However, when choosing a non-conforming loan, the debt to income ratio allowed is up to 55 with a rate increase of approximately .75-1.00%.
Proof of self-employment of 4 years for the best rate. With just 2 years of self-employment, the non-conforming loan with the higher rate is one option or a bank statement loan.
Approval is dependent on findings from Freddie Mac's automated underwriting system which analyzes the loan amount, loan-to-value and debt to income ratios along with the borrower's FICO credit scores, liquid assets, and other associated criteria. If you are self-employed or a W2 wage earner and have been declined elsewhere, this may be a great option.
A conforming loan for self-employed borrowers allows a middle credit score of 640 along with approval from Freddie Mac's automated underwriting. Borrower's with a lower score will need to provide two years of tax returns. It is worth noting that Fannie Mae recently changed its program to allow for just one year of tax returns.
PURCHASE & REFINANCE (no cash out):
Primary Residence - Just 5% down, or 95% financing up to $510,400 (as much as $765,600 in certain counties of California, Colorado, and Florida)
- 15% down for W2 or salaried borrowers up to $1.5 million.
- 20% down on 2 - 4 units
NOTE: Some lenders have overlays and reduce the maximum to 90% financing
Second Home - 15% down, or 85% financing.
Investment Property - 15% down, or 85% financing
- 25% down on 2 - 4 units, 75% financing
REFINANCING with Cash Back:
For loan amounts $510,401 up to $765,600 in high cost counties, cash out is available on:
Primary Residence - Single Family home up to 75% LTV
primary residence - 2 - 4 unit up to 65%
If you need a loan amount above these limits ($510,401 or $765,600) with One-year of 1040 returns, then a jumbo portfolio loan is needed. A maximum of 70% financing is allowed in those cases on a cash-out refinance.
Reasons You may not be approved for using one year of Federal Tax Returns
Recent Foreclosure or Short sale
Low credit scores below 640
Low liquid reserves
Loan amount is over Conforming Limit (Portfolio product allows jumbo loans)
Income is averaged over 24 months
*** If you have a low credit score and/or low reserves, and NO recent bankruptcy, foreclosure, or short sale, then FHA may be the best option.