I am not referring to the rule where you only need one year tax returns if you have been in business for five years. That still exists for both Fannie and Freddie.

I am referring to the rule where you only need to be Self-Employed for one year and still get conventional financing.

HERE ARE THE RULES FOR FANNIE AND FREDDIE

• You must provide two years of tax returns.
• You only need to show one full calendar year of Self-Employed on the returns.
• Must have been in a similar field or occupation as current business.
• Must provide YTD financial statements to show current activity.
• Another option is last 3 months bank statements showing activity.

FOR FREDDIE MAC ONLY

Freddie Mac will evaluate the Self-Employed income as well as the previous employment in the same line of work. They will take the lesser of the two numbers. If their W2 wages from the year prior to self-employment are less than the Self-Employed income, then they will use the W2 wages. I assume they think if anything happens the borrower can always go back to being W2.

Fannie Mae uses the Self-Employed income as long as it can be justified. Fannie will likely average the income vs giving you the higher Self-Employed business income only.

FYI, FHA has a similar rule with Self-Employed if they were in the same line of work before becoming self-employed.