How 1099 Employees Can Get Approved for a Mortgage Loan in 2023

As a 1099 employee, qualifying for a mortgage might seem daunting But with the right preparation, you can get approved for home financing

In this comprehensive guide, we’ll explain everything 1099 workers need to know about getting a mortgage, from document requirements to loan options.

What is a 1099 Employee?

A 1099 employee is someone who works as an independent contractor, not a payroll employee. 1099 workers don’t have taxes withheld from their paychecks. Instead, they receive a 1099 tax form at year-end, reporting their annual earnings to the IRS.

Common 1099 jobs include:

• Consultants
• Freelancers
• Real estate agents
• Drivers for Uber, Lyft, DoorDash etc.
• Other gig economy workers

Since 1099 employees don’t get regular pay stubs, they need to provide alternate income documentation when applying for a mortgage. This often means more upfront work. But with proper preparation, 1099 borrowers can absolutely qualify for home loans.

Mortgage Requirements for 1099 Workers

While requirements vary by lender, here are some common standards 1099 borrowers need to meet:

• Credit score: Most lenders require a minimum score around 620. The higher your score, the better your mortgage rates and terms will be.

• Down payment: Ideally 10-20%. Though loans with 3% down exist. The more you put down, the better.

• Debt-to-income ratio Your total monthly debt payments including the new mortgage should be less than 43% of your gross monthly income. The lower the better.

• Tax returns: Two years of personal and business tax returns will be required to document your income.

• Proof of Income: Bank statements, 1099s, and profit and loss statements help prove your income is stable.

• Taxable income: Lenders will assess your income minus write-offs to determine if you qualify.

• Time in business Two years of self-employment in the same field is ideal. One year may work with good credit and income.

Meeting these requirements demonstrates to lenders that you can repay the mortgage long-term.

Documenting Your Income as a 1099 Employee

As a 1099 worker, you’ll need to provide alternative income documentation since you don’t get payroll pay stubs.

Required documents typically include:

• 1099 Tax Forms – Submit 1099s from the past 2 years to show your annual earnings.

• Schedule C Tax Forms – If you deduct business expenses, lenders will review your Schedule C to determine your net business income.

• Bank Statements – Provide 12-24 months of personal and business bank account statements to show regular deposits.

• Profit & Loss Statement – This financial statement summarizes your revenue and expenses for your business.

Work with your mortgage lender and accountant to put together the strongest documentation possible. The more complete your file, the easier approval will be.

How Lenders Calculate Income for 1099 Borrowers

Lenders need to review your taxable income to determine if you make enough money to afford the new mortgage payment. Here are the key steps lenders take:

1. Verify your gross income – This is your total 1099 earnings before any deductions.

2. Deduct valid business expenses – Lenders analyze your Schedule C and deduct qualified business expenses from your gross income to determine your net business income.

3. Add back non-cash deductions – Certain deductions like depreciation don’t affect your cash flow, so lenders add them back in. This gives them a more accurate picture of the profits you have available to pay the mortgage.

4. Average income over 2 years – Lenders take an average of your taxable income over the last 2 years to account for any fluctuations or growth.

5. Apply income to mortgage ratios – Finally, the lender verifies the resulting income amount is sufficient to maintain key debt-to-income ratios.

Thoroughly documenting your 1099 income upfront will make this process smoother.

1099 Mortgage Loan Options

The good news is 1099 employees have access to the same major mortgage programs as W-2 workers, including:

Conventional loans – Offered by private lenders and backed by Fannie Mae or Freddie Mac. Require a minimum 620 FICO score and 3% down payment. Conventional loans are ideal for borrowers with good credit and moderate down payments.

FHA loans – Insured by the Federal Housing Administration. Require just a 580 FICO score and 3.5% down. A great option for borrowers with lower credit scores or incomes.

VA loans – Offered by private lenders and guaranteed by the U.S. Department of Veterans Affairs. Require no down payment or mortgage insurance. Best option for eligible borrowers.

USDA loans – Backed by the U.S. Department of Agriculture for low-to-moderate income borrowers in rural areas. Also require zero down payment.

Non-QM loans – Offered by specialty lenders. May require bank statements rather than tax returns to document income. Can be an option when tax returns don’t tell the full story. Higher rates than conventional mortgages.

Shop and compare loan options from multiple lenders to find the best fit for you.

Tips for Getting Approved for a 1099 Mortgage

Follow these tips to boost your chances of getting approved for a mortgage as a 1099 employee:

• Maintain good credit – Pay all bills on time and aim for a credit score over 740. Higher scores mean better mortgage rates and terms.

• Limit debt – Keep credit card balances low and your debt-to-income ratio under 36% for the strongest application. Pay down debts if needed.

• Start gathering documents early – Get your paperwork in order at least 6 months before applying. This gives you time to address any issues.

• Watch for income gaps – Provide documentation to explain any gaps or inconsistencies in your 1099 earnings. For example, seasonal work.

• Show strong bank balances – Having 6-12 months of mortgage payments in reserves helps compensate for inconsistent 1099 income streams.

• Consider a higher down payment – Putting 20% or more down shows lower risk to lenders and can help you qualify.

• Find the right lender – Look for lenders familiar with self-employed borrowers. They’ll know how to assess your situation. Mortgage brokers can help too.

With proper preparation and documentation, you can get mortgage approval as a 1099 worker.

FAQs About 1099 Mortgages

Can 1099 workers get mortgages?

Yes, you can absolutely get approved for a mortgage as a 1099 employee. Lenders will just require alternate income documentation since you don’t get regular pay stubs. Providing 1099s, tax returns, bank statements, and other verification will be key.

What credit score do 1099 workers need?

Most lenders like to see a credit score of at least 620-640 for conventional financing. FHA loans can be obtained with scores as low as 580. The higher your credit score, the better mortgage rates you’ll qualify for.

How much down payment do 1099 borrowers need?

Typically 10-20% is recommended. Conventional loans allow down payments as low as 3%. FHA is 3.5% down. VA and USDA require zero down payment for eligible borrowers. In general, larger down payments make approval easier.

What debt-to-income ratio do lenders want for 1099 workers?

Lenders prefer a debt-to-income ratio below 43%. The lower the ratio, the less financial risk you pose. Keeping your DTI below 36% will boost your chances of approval. Paying down debts can help lower your ratio.

Should 1099 borrowers use a mortgage broker?

Working with a broker experienced in self-employed loans can streamline the process. They know which lenders will best accommodate 1099 income documentation. Just be sure to still compare multiple loan offers and mortgage rates.

The Bottom Line

As a 1099 employee, qualifying for a home loan is absolutely possible with proper preparation. Get your finances in order, choose the right mortgage program, document your income completely, and find lenders familiar with self-employed borrowers. This will put you in the best position to get approved and land a great mortgage rate.