Self-employed - is it 2 years of work or 2 tax returns for mortgage?

I’ve been self-employed for 14 years, but about 1.5 years ago, I switched to a higher-paying 1099 contract role. My income went from $30k on my 2022 tax return, to $90k in 2023 (for 8 months of the new job), and I expect over $130k on my 2024 return after deductions.

My middle mortgage credit score (FICO 5, 4, and 2) is around 755. I’d like to buy a house in the $350k - $400k range with 20% down before my lease ends in January 2025. I’ll reach 2 years in the new job by April 2025.

Does it make a difference if I apply in February 2025 after filing my taxes, or should I extend my lease and apply after reaching 2 full years in July 2025? I need to decide on extending my lease soon. Thanks in advance!

Assuming you’re still filing a schedule C with your 1099 job, you’ll want to start the application process now to see if you qualify. Generally, conventional loans need 2 years of tax returns to average your monthly income, but sometimes the automated underwriting system (DU and LP) allows just one year.

With your credit profile and long self-employment history, there’s a good chance this could work for you. Have your lender try both Fannie Mae and Freddie Mac systems to see if they can waive the 2-year requirement. But keep a backup plan just in case, as automated systems can be unpredictable.

Since you’re planning to file taxes early 2025, filing in person at the IRS office and getting a stamped copy can help avoid delays while transcripts process.

@Ellis
From my experience, if you’ve had business ownership for over 5 years, one year of tax returns usually works, as long as you have proof, like a state business license.

Blue said:
@Ellis
From my experience, if you’ve had business ownership for over 5 years, one year of tax returns usually works, as long as you have proof, like a state business license.

That depends on DU findings, but sometimes it will still ask for two years.

@Ellis
If your income is 1099, then yes, file as a schedule C. If it’s W2 income, you should be fine.

@Ellis
Thanks for the advice! My income is 1099, paid weekly by direct deposit. I was planning to e-file with a CPA’s help, but you mentioned filing in person. Wouldn’t the electronic 1040 and schedule C copies work just as well for the mortgage?

Also, do I need to pay the full tax balance when I file in January, or can I wait until April while using the 1040 to apply in February?

@Ashton
Mortgage lenders typically need an IRS transcript, which can take time to be available after e-filing. Filing in person and getting a stamped copy might help avoid delays while waiting for transcripts. You’d likely need to pay your balance when filing in person, but check with your loan officer to confirm.

You’ll need 2 years of tax returns and 3 months of bank statements. Just make sure everything with the IRS is paid up.

Devi said:
You’ll need 2 years of tax returns and 3 months of bank statements. Just make sure everything with the IRS is paid up.

Thank you! So I need to file and fully pay my 2024 taxes before applying?

@Ashton
Yes, and if you have a state business license, make sure it’s up-to-date. Judgments and liens can complicate things. I once had an old $300 judgment on my record from a video rental! Clean credit helps, though.

@Devi
Wow, that’s rough! Thanks for the info. My credit has no judgments, and I paid off my student loans last year. No state licenses or LLC—just a sole proprietorship and one car loan for $350/month.

@Ashton
Your car loan shouldn’t hurt your chances.

Devi said:
@Ashton
Your car loan shouldn’t hurt your chances.

Good to know, thanks!

If you’ve been self-employed for 14 years, they’ll average your income over 2 years, possibly with a year-to-date P&L. Even though your recent work is a higher-paying 1099 contract, it’ll likely be treated as continuous self-employment income.

@Axelle
Thank you! It’s not the same line of work, though. I did web design for 14 years, making around $30k, then switched to commission-based 1099 work in a new field. Since my 2024 income is so much higher, I thought waiting to apply with my 2023 and 2024 returns would be better than using 2022’s lower income.

I can usually qualify someone with one year of tax returns if they’ve been in the same line of work for over two years.

It’s generally 2 years of working history, averaged over 2 years when you apply. Going with W2 income could simplify the process.

Poe said:
It’s generally 2 years of working history, averaged over 2 years when you apply. Going with W2 income could simplify the process.

So February could work, then? Do I have to pay the full taxes owed to use the 1040 for my application, or can I file in February and pay by April?

@Ashton
It depends on the situation. You could try applying with a loan officer first, but they’ll likely use your 2023 income of $90k until you file 2024 taxes.

Clare said:
@Ashton
It depends on the situation. You could try applying with a loan officer first, but they’ll likely use your 2023 income of $90k until you file 2024 taxes.

Thank you for the advice! I’ve been self-employed for 14 years, but recently switched fields to a higher-paying 1099 role. I want to avoid credit hits until I’m sure I’m ready, especially since new construction incentives require using their lender. It sounds like waiting until January to apply might be best.