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.
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 applicant's 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.
Who Should Get a 1099 Loan?
1099 loans are a great option for self-employed borrowers, freelancers, contractors, and so on, who file using W-9s tax forms and will likely not qualify for a traditional mortgage.
In many cases, independent contractors write off their business expenses. This strategy helps them lower their tax burden but also reflects negatively on their taxable income and may disqualify them from a traditional mortgage. A 1099 mortgage loan evaluates the would-be borrowers’ financial soundness based on income from 1099 instead of tax returns.
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.
CrossCountry Mortgage’s 1099 Mortgage Loan Program
The CCM 1099 mortgage loan program is available in all 50 states and allows the borrower to qualify for 15, 30, or 40-year home loans as well as different adjustable rate mortgages. Borrowers must receive at least 50% of their income from 1099 to qualify for this mortgage program and are allowed to utilize a co-applicant.
Applicants to the CrossCountry Mortgage 1099 Mortgage Loan Program must present the following documentation:
- Most recent 1 or 2 years of 1099(s)
- Documentation of YTD income
- Check stubs or bank statements dated within 120 days of the note date
- 1099 transcripts only (full tax transcripts not required)
- 2 year’s employment history must be verified
- Examples: Written VOE, CPA Letter