1099 Mortgage
Mortgages aren’t just for W-2 employees. Many people are self-employed, an umbrella term that includes independent contractors, seasonal workers, freelancers, gig workers, vendors, and others whose income is documented on an IRS Form 1099. 1099 mortgages are designed for borrowers with these non-traditional sources of income.
What is a 1099 mortgage?
Instead of requiring full tax returns, a 1099 mortgage relies on the income you report to the IRS via Form 1099. This is a major advantage if you’re self-employed and maximize your tax deductions, because it allows you to meet your loan requirements with your full income, instead of your deduction-reduced taxable income.
Non-QM loans
Home lending reforms enacted following the 2008 housing crisis established two broad mortgage categories: Qualified and Non-Qualified.
Qualified Mortgages require lenders to use only the taxable portion of the borrower’s wages for qualification purposes. This is relatively straightforward if you file a W-2, because the income is typically regular and easily verifiable. However, not every borrower fits those standards, including self-employed individuals, real estate investors, foreign nationals, and others.
Non-Qualified Mortgages (Non-QM), which include 1099 home loans, provide an alternative. They use atypical methods of income verification to check the borrower’s ability to meet their mortgage obligations. For example, the underwriter may verify eligibility by checking the borrower’s bank statements. Since Non-QM loans can be riskier for lenders, they typically have lower loan-to-value limits, and require higher interest rates and credit scores.
How do 1099 mortgages work?
The basics of a 1099 mortgage are the same as any other home loan. You’re borrowing money from a lender and need to prove that you are creditworthy, that is, you can repay the loan, plus the interest charged as the cost of lending you the money.
You’ll need to meet credit score, debt-to-income, and other basic loan requirements. The big difference is that you won’t need to supply your full tax returns. Instead, you’ll need 1099s, proof of income year-to-date, and verification of 2 years’ employment history.
Who are 1099 mortgage loans for?
These loans are designed for borrowers whose income is reported on IRS Form 1099. Broadly speaking, that’s self-employed borrowers. You could be an independent contractor, sole proprietor of a business, or partner in a business. You might describe yourself as a freelancer, gig worker, or vendor. The key point is that your income is reported on a 1099 and not a W-2.
Mortgage loans for self-employed borrowers
1099 mortgages are not the only choice for self-employed borrowers. Bank statement loans are another option, relying on 12 or 24 months of bank statements as proof of income. Self-employed borrowers may also qualify for conforming, FHA loans, or VA loans.
How to calculate self-employed income for a mortgage loan
To get a general idea of your monthly self-employment income, use your most recent one or two years of 1099s, divide the total by either 12 (for one year) or 24 (for two years).
However, when an underwriter evaluates your loan application, they’ll consider whether your income is increasing, stable, or decreasing. If it’s decreasing, you may need to provide additional documentation.
1099 mortgage loan requirements
To qualify for a 1099 mortgage, 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 salaried borrowers, they must show that their business is profitable and consistent enough to provide the needed funds.
In addition, since these mortgages are seen as riskier than traditional mortgages, lenders often require that borrowers have higher credit scores (at least 620) and lower debt-to-income ratios (typically 50% or less).
How to get a 1099 mortgage
You’ll need to complete a mortgage application, as you would with any home loan. However, your employment and income documentation is unlike a typical mortgage. Instead of providing W-2s, full tax transcripts, and employment verification from your employer, you’ll need the following:
- Most recent 1 or 2 years of 1099(s)
- Documentation of year-to-date income
- Check stubs or bank statements dated within 120 days of the loan note date
- 1099 transcripts only (full tax transcripts not required)
- Verification of 2 years’ employment history
- Examples include written verification of employment or CPA Letter
1099 mortgage FAQs
Here are answers to a few questions you may have, but as with any mortgage, your loan officer is your best resource.
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Yes! You’ll need to supply your most recent 1 or 2 years of 1099s, documentation of year-to-date income, 1099 transcripts, and verification of 2 years of self-employment.
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While a W-2 employee can be full- or part-time, they generally receive all or most of their income from one employer, who withholds taxes and reports the income on Form W-2. A 1099 employee isn’t really an employee in the traditional sense. They are self-employed individuals who may have many clients or customers. Their income is reported on Form 1099 with no tax withheld.
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Not when you choose CrossCountry Mortgage as your lender. We understand self-employment and have experience evaluating non-traditional income sources.
