According to a recent McKinsey’s American Opportunity Survey, 36% of employed Americans identify as self-employed, representing a significant increase from an estimated 27% in 2016. This number includes “side hustles,” but 72% of independent workers say they have only one job. Those individuals, who include independent contractors, seasonal workers, vendors, freelancers, gig workers, and individuals who complete side jobs, often have difficulties securing a traditional mortgage.
Although this form of employment comes with benefits, such as greater flexibility and the ability to set rates and work schedules, it can be a significant hindrance when applying for a home loan. Most underwriters focus on elements such as steady employment, regular income, and tax returns to determine a borrower’s eligibility for a mortgage. However, independent contractors who receive 1099 earning statements often fall short in all those categories.
Although they may not qualify for traditional mortgages, self-employed individuals do not necessarily need to renounce their dreams of homeownership. 1099 mortgage loans are designed to help non-employees buy a home even if they may be ineligible for traditional home loans.
As a 1099 employee getting approved for a mortgage can seem daunting. Traditional lenders often want to see steady W-2 income and substantial tax returns. But there are lenders who specialize in working with self-employed borrowers like 1099 workers. With the right preparation and research, you can get approved for the home loan you need.
What Does It Mean to Be a 1099 Employee?
First, let’s clarify what it means to have 1099 income. 1099 employees are contract or freelance workers who get paid on a per-project basis Instead of receiving a regular paycheck with taxes taken out, 1099 workers get an IRS Form 1099 at the end of each year stating their total earnings.
As the borrower, you are responsible for paying estimated quarterly taxes on your 1099 income. You also have to pay the full Social Security and Medicare taxes that an employer would normally split with a W-2 employee.
Being a 1099 worker gives you flexibility but less predictability when it comes to your income. Since your income can fluctuate month-to-month, lenders view 1099 borrowers as higher risk than W-2 employees.
Why Do Lenders View 1099 Borrowers as Risky?
Lenders like to see stable income when approving borrowers for a mortgage. With 1099 workers, there are some key concerns:
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Income volatility – 1099 income often fluctuates month-to-month, which makes lenders nervous about your ability to pay the mortgage.
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Higher debt-to-income ratios – 1099 workers have to pay self-employment taxes, which lowers your net income. This results in a higher debt-to-income ratio.
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Harder to verify income – 1099 workers don’t get pay stubs Lenders have to rely on bank statements and tax returns to confirm your income
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Potential for income inflation – 1099 workers can inflate their income to qualify for a bigger loan, which is a risk for lenders.
While these factors make getting a mortgage tougher, they aren’t deal breakers. Plenty of lenders will work with 1099 borrowers who can provide documentation of steady self-employment income.
How 1099 Income Is Calculated for Mortgage Approval
Lenders have specific methods for calculating and documenting 1099 income:
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Two years of 1099 tax forms – Most lenders want to see your 1099-MISC forms from the past two years to prove you’ve received steady 1099 income.
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1099 income averaged over two years – Lenders will average your income over two years to account for fluctuations. For example, they may average your income from 2020 and 2021.
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Personal and business tax returns – Expect to provide your personal tax returns and business tax returns if you have a separate business entity.
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1099 bank statements – You’ll need to provide bank statements showing regular deposits of 1099 income. Statements must show income consistent with your tax returns.
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YTD profit and loss statement – For the current year, lenders may ask for a year-to-date profit and loss statement certified by a CPA. This helps confirm your income is on pace with previous years.
The lender needs to fully document and source your 1099 income. Be prepared to provide all applicable tax documents and bank statements.
Minimum Requirements for 1099 Borrowers
While every mortgage lender has their own requirements, here are some typical minimum standards for approving 1099 borrowers:
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2 years of consistent 1099 income – You’ll need to show 1099 income over the past 2 years through tax docs. Gaps or big declines in income could disqualify you.
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Minimum 680 FICO score – Most lenders want at least a 680 credit score for 1099 borrowers. A higher score gives you better mortgage rates.
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Larger down payment – Expect a minimum 10% to 20% down payment requirement. More equity reduces the lender’s risk.
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12 months’ reserves – You may need 12 months’ worth of mortgage payments in your bank account to cover gaps in 1099 income.
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Lower DTI – Lenders like to see a debt-to-income ratio below 43% for 1099 borrowers. A lower DTI helps offset income variability.
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No recent bankruptcy or foreclosure – Most lenders require at least 2 to 5 years since bankruptcy or foreclosure to approve a mortgage.
Meeting these standards shows lenders you’re a lower credit risk and can repay the mortgage. Come prepared with documentation so the lender can swiftly verify your income.
Types of Loans for 1099 Borrowers
As a 1099 employee, here are some types of mortgages you may qualify for:
Conventional Loans
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Conforming loans – These conventional loans meet the standards for purchase by Fannie Mae or Freddie Mac. However, you’ll need excellent credit and steady 1099 income.
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Non-Qm loans – Non-qualified mortgages can have more flexible income requirements for self-employed borrowers. But expect higher rates and larger down payments.
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Portfolio loans – Banks and credit unions that hold loans “in-house” may offer portfolio lending programs with alternative income documentation for the self-employed.
Government-Backed Loans
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FHA loans – FHA is more flexible than conventional loans when it comes to income and down payment. But 1099 borrowers still need good credit and stable earnings.
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USDA loans – In rural areas, USDA mortgages offer 100% financing and relaxed underwriting. But 1099 income must be verified.
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VA loans – Veterans Administration loans work for 1099 borrowers who qualify. VA doesn’t require a down payment or PMI.
While government programs can be more lenient, you may pay higher mortgage insurance rates. Conventional loans offer lower rates but stricter requirements.
Documents Needed to Apply for a 1099 Mortgage
When applying for a mortgage as a 1099 employee, it’s essential to have all required documents ready to go. Here’s a checklist of what you’ll need:
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1099 tax forms – Provide your 1099-MISC forms from the past 2 years
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Personal tax returns – Have 2 years of your personal tax returns including all schedules and 1040s
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Business tax returns – If applicable, supply 2 years of tax returns for your business entity
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Profit and loss statement – Supply a year-to-date P&L statement through a CPA
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Bank statements – Provide 12+ months of bank statements showing 1099 deposits
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Photo ID – Supply a valid government-issued photo ID
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Employment history – List 5 years of employment history detailing all 1099 income
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Assets and reserves – Account statements proving you have funds for down payment and reserves
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Liabilities – List all debts, loans, credit cards, alimony, child support owed
The more documentation you have, the easier it will be for a lender to approve you. Reach out well in advance to get your paperwork in order.
Tips for Getting Approved for a 1099 Mortgage
As a 1099 employee, here are some tips to boost your chances of getting approved for a home loan:
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Maintain consistent 1099 income – Show a reliable 2-year history of 1099 income through your tax returns. Avoid large declines.
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Get your books in order – Review all tax documents. Have a CPA prepare your profit-and-loss statement.
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Pay down debts – Reduce credit card balances and other debts to lower your DTI ratio. Pay all bills on time.
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Save for a larger down payment – Shoot for 20% down or more. More equity will make lenders comfortable.
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Shop multiple lenders – Compare loan options from mortgage brokers, banks, and credit unions. Ask about alternative income programs.
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Talk to a specialized broker – Mortgage brokers focused on self-employed borrowers can help you find the right lender.
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Highlight previous successes – Provide evidence you’ve taken out and repaid loans or lines of credit before.
With proper preparation, there are lenders who will work with 1099 employees and self-employed borrowers. If one lender declines you, keep shopping around until you find the right mortgage fit.
Frequently Asked Questions About 1099 Mortgages
Here are answers to some common questions about getting approved for a home loan with 1099 income:
How much income do I need to qualify as a 1099 employee?
Most lenders want to see at least $50,000 to $100,000 per year in 1099 income over the past 2 years. The more consistent your income, the better.
Do I need 2 years of 1099 income to get approved?
In most cases, you need a minimum of 2 years of 1099 income documented through tax
What is a Non-Qualified Mortgage?
Non-qualified mortgages, which include 1099 home loans, provide an alternative path to homeownership for borrowers who would not be eligible for qualified mortgages like conventional loans.
Qualified mortgages meet specific standards set forth by the Consumer Protection Act and the Dodd-Frank Wall Street Reform Act, signed by President Obama following the 2008 housing crisis. According to those criteria, the lender is restricted to using only the taxable portion of the applicants wages for qualification purposes. The procedure is relatively straightforward for employees who file a W-2 tax form since their income is typically regular and easily verifiable. However, not every borrower fits those standards. It is the case of self-employed individuals but also real estate investors, foreign nationals, and so on.
Non-qualified mortgages, on the other hand, use atypical methods of income verification to check the would-be borrowers’ ability to meet their mortgage obligations. For example, the underwriter may check the borrowers’ bank statements and other proofs of income, like 1099s, to verify their eligibility. Since non-qualified mortgages can be riskier for the lenders, they typically have lower loan-to-value limits as well as higher interest rates and credit score requirements.
How to Qualify for a 1099 Mortgage Loan?
In order to qualify for a 1099 mortgage loan, borrowers must be able to prove that their income is sufficient to meet their mortgage obligations. Although their monthly income may not be as regular as employed borrowers receiving a salary, they must show that their business is profitable and consistent enough to provide the funds for a home loan despite the uncertainties that come with self-employment.
Since 1099 mortgage loans are perceived as riskier for the lending institutions than traditional mortgages, lenders often require would-be borrowers to have higher credit scores (at least 620 and over) and lower debt-to-income ratios than typical mortgages (typically 50% or less DTI.) It also means that the mortgage lenders will require more supportive documents: 1099 mortgage loan applications can be paperwork-heavy. The more documentation the borrower can provide to support their claim on their financial stability and ability to generate an income, the more likely it is that their application will be approved. The specific loan requirements for a 1099 mortgage loan depend on the lending institution, but the borrower must typically satisfy the following criteria.
To qualify for a 1099 mortgage loan, the borrower must be self-employed for at least one to two years, depending on the type of loan they are applying for. The borrower must provide employment verification documentation, such as communications with your licensed, certified personal accountant (CPA), proof of business such as business licenses, business insurance, membership to professional organizations, and so on. You must also demonstrate that you have a steady, reliable income using your 1099, but also other proofs of income, including bank statements, checks, and paystubs if you have another form of employment or other proof of payments.
If you intend to apply for a mortgage, it may be best to keep your business and personal expenses separate to minimize your credit utilization and increase your chances of being approved for a home loan.