Introduction
Securing a mortgage can be challenging, especially for self-employed borrowers, independent contractors, and small business owners. Traditional lenders often require two years of tax returns to verify income stability. However, some lenders offer 1-year tax return mortgage options, making homeownership more accessible. This guide explores 1-year tax return mortgage lenders, their requirements, benefits, drawbacks, and how borrowers can maximize their chances of approval.
Table of Contents
What Is a 1-Year Tax Return Mortgage?
A 1-year tax return mortgage allows borrowers to qualify for a loan using only the most recent year’s tax return instead of the standard two years. This option benefits individuals whose income has recently increased or those who have been self-employed for a short period but have strong financials.
Who Qualifies for a 1-Year Tax Return Mortgage?
Lenders offering 1-year tax return mortgages typically cater to borrowers who meet the following criteria:
- Self-employed individuals with at least one year of business history
- Independent contractors with consistent income
- Freelancers who show steady earnings in the past year
- Small business owners who demonstrate financial stability
- Gig economy workers with verifiable income
Comparing 1-Year vs. 2-Year Tax Return Mortgages
| Feature | 1-Year Tax Return Mortgage | 2-Year Tax Return Mortgage |
|---|---|---|
| Income Verification | Based on the most recent tax return | Based on the average of two years of tax returns |
| Eligibility | Suitable for those with recent income growth | Ideal for those with consistent income over multiple years |
| Risk to Lender | Higher risk due to limited income history | Lower risk with a longer track record |
| Interest Rates | May be slightly higher due to increased risk | Typically lower due to greater income stability |
| Loan Options | Available from non-QM lenders and some traditional lenders | Widely available from most lenders |
Loan Programs That Accept 1-Year Tax Returns
1. Non-QM Loans
Non-qualified mortgage (Non-QM) loans are common for borrowers who do not meet standard lending guidelines. These loans allow more flexible income verification and debt-to-income (DTI) ratios.
2. Bank Statement Loans
Bank statement loans use 12 months of personal or business bank statements instead of tax returns. This option benefits those with significant business deductions that reduce taxable income.
3. FHA and VA Loans
Some lenders may offer FHA or VA loans with only one year of tax returns if the borrower can show a strong financial position.
Example of 1-Year Tax Return Mortgage Qualification
Scenario:
John, a freelance graphic designer, earned $120,000 in 2023 but had a lower income in previous years. He wants a mortgage with a 10% down payment.
- Income Used: $120,000 (2023 tax return)
- DTI Ratio: 40%
- Loan Amount: $400,000
- Interest Rate: 6.5% (higher than conventional loans)
John qualifies based on his most recent income, whereas a traditional lender averaging two years of income would have lowered his borrowing capacity.
Pros and Cons of 1-Year Tax Return Mortgages
Pros
- Faster qualification for borrowers with rising income
- Easier for new business owners
- Greater flexibility in income documentation
Cons
- Higher interest rates
- Limited lender availability
- Stricter requirements for credit scores and reserves
Lenders Offering 1-Year Tax Return Mortgages
Several lenders specialize in 1-year tax return mortgages. These include:
- Non-QM lenders
- Credit unions with flexible underwriting
- Mortgage brokers with access to alternative programs
- Private lenders offering customized solutions
How to Improve Approval Chances
- Maintain a strong credit score (700+ preferred)
- Reduce DTI ratio by paying off existing debts
- Increase cash reserves to show financial stability
- Provide detailed documentation of income sources
Conclusion
A 1-year tax return mortgage offers a valuable solution for self-employed borrowers and those with recent income growth. While the option may come with higher interest rates, it provides flexibility that can make homeownership more attainable. Prospective borrowers should assess their financial position, research lenders, and take steps to strengthen their mortgage application for the best results.
