Skip the Two-Year Average: How Self-Employed Borrowers Can Qualify on One Strong Tax Year

The standard mortgage process asks for two years of tax returns. For most self-employed borrowers, that's where the conversation gets complicated.

Two years of returns sounds straightforward until you factor in what those returns actually show. If one of those years was lower — a year you traveled more, made a major business investment, or worked with your CPA to limit taxable income — averaging the two years can reduce your qualifying income significantly. Sometimes enough to push you out of range for the home you're buying.

What most borrowers don't know is that there's an exception. Under both Fannie Mae and Freddie Mac guidelines, self-employed borrowers with an established business can qualify using just one year of tax returns. The most recent year. The one that actually reflects where your business is today.

How the One-Year Exception Works

This isn't a workaround or a specialty product. It's a documented option built into conventional loan guidelines — the same guidelines that govern the majority of mortgages in the country.

Both Fannie Mae and Freddie Mac allow the use of a single year of personal and business tax returns when two conditions are met: the business has been in operation for at least five years, and the borrower has held at least 25% ownership for those five consecutive years. When both are true, the lender can use only the most recent year's returns to calculate qualifying income.

For a borrower whose 2024 income was significantly lower than 2025 — for any reason — that distinction is the difference between qualifying with a portion of their actual income or qualifying at 100% of it.

I worked with a borrower recently whose 2024 income was considerably lower than 2025. If we had averaged both years, we would have had only about 75% of their actual current income to work with for qualification purposes. Using the one-year option, we used the full 2025 number. That's not a rounding difference — for most buyers, that's the loan.

Why One Year Is Sometimes the Stronger Story

There are a few common scenarios where a single strong year tells the more accurate picture.

Some business owners take a year to travel, step back, or focus on areas of the business that don't immediately generate revenue. The following year returns to normal — or better. The lower year was real, but it wasn't representative. Averaging it in penalizes the borrower for a temporary and intentional decision.

Others make a significant business investment in one year — equipment, staff, expansion — that reduces profit on paper while building future capacity. The investment year looks weak. The year after looks strong. The trajectory is upward. A two-year average flattens that trajectory in a way that doesn't reflect the borrower's actual financial position.

And then there's proactive tax planning. Many self-employed borrowers work with their CPA to manage taxable income strategically — taking deductions when it makes sense, maximizing write-offs in strong years. If you know you're going to buy a home, it's worth having a conversation with your CPA before the tax year closes. Limiting deductions in your qualifying year can meaningfully improve what lenders see without changing your underlying income at all.

What Lenders Are Looking For

The one-year exception isn't automatic. Lenders are still evaluating whether your self-employment income is stable and likely to continue. A single strong year on a brand-new business doesn't qualify — the five-year business history requirement exists precisely because longevity is part of what makes income reliable in underwriting.

Beyond the tax returns themselves, lenders want to see evidence that the business has been operating for at least five years. That can come from business licenses, professional registrations, prior filings, or other documentation that confirms the business age. For partnerships, S-corps, and corporations, business returns must support the ownership and tenure information on the application. For sole proprietors, the personal return and supporting records carry that weight.

Credit matters here too. This option works best with a credit score above 680. And lenders are looking for reserves — evidence that you have savings beyond what's needed to close. Business income can fluctuate, and liquid assets provide a cushion that underwriters factor into the overall picture.

One more detail worth knowing: if you own multiple businesses, each one gets evaluated separately. One business may qualify for the one-year option while another still requires two years of returns. The analysis is done at the business level, not the borrower level.

The Lender Overlay Question

Agency guidelines set the floor. Individual lenders can set their own additional requirements on top of those guidelines (called overlays) and some do.

That means the one-year option may be available under Fannie Mae or Freddie Mac guidelines but restricted by a specific lender's internal policy. Working with a broker rather than a single lender matters here: if one lender's overlay rules it out, another lender may not have that overlay at all. The same loan, the same borrower, the same guidelines — just a different lender.

Is This the Right Option for Your Situation?

It depends on what your two years of returns actually show and what you're trying to qualify for. The one-year exception is valuable when your most recent year is materially stronger than the year before it. If both years are strong, a two-year average works fine. If the prior year is the stronger one, the one-year option wouldn't help you anyway.

The starting point is always the same: look at the actual numbers. What does each year show? What's the difference between a one-year and two-year calculation? Does the five-year business history requirement apply to your situation? Those questions have specific answers, and those answers determine whether this option is relevant to you.

Most self-employed borrowers I work with are further along than they think. If your most recent tax year is your strongest, it's worth a conversation before you assume the two-year average is your only path. I'm easy to reach.