Mortgage Loans for 1099 Employees: How to Get a Mortgage When You’re Self-Employed

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    Traditionally, self-employed individuals — also referred to as 1099 employees — have faced challenges in securing a mortgage loan to finance the purchase of a home or refinance an existing mortgage loan. But now, the increased pervasiveness of self-employment and the gig economy have influenced lenders’ attitudes to make mortgage loans for 1099 employees easier to access.

    A 1099 employee is a self-employed worker who operates as an independent contractor; consultant; freelancer; seasonal worker; sole or majority proprietor; or gig worker (such as a rideshare driver or Airbnb host). The name 1099 employee stems from the Internal Revenue Service’s 1099 form that self-employed individuals have to submit to report their earnings for income tax purposes. Around one-third of Americans now identify as self-employed.

    Although lenders are nowadays more open to extending credit to self-employed workers, home loans for 1099 employees will typically require more paperwork and additional steps compared to regular (W-2) workers. These challenges mostly stem from the general consideration that 1099 employees are not full-time workers and, as such, do not have a fixed, stable monthly income in the form of a salary.

    The main challenges in obtaining home loans for 1099 employees are:

    ♦ Business expense documentation

    ♦ Credit score and history

    ♦ Tax deductions

    ♦ Debt-to-income (DTI) ratio of max. 45%

    ♦ Two-year operational history

    ♦ Down payment requirements

    Because lenders prefer borrowers with fixed, stable incomes when extending credit, 1099 employees will usually face additional challenges compared to regular workers. To maximize your chances of obtaining a mortgage loan for 1099 employees, you will have to address and overcome the main challenges to securing a loan. This includes:

    Regular W-2 workers generally prove their income by submitting tax returns or pay stubs. However, providing proof of income requires a broader effort for self-employed individuals, especially because you also have to prove the stability and regularity of your income. For instance, 1099 employees can usually provide proof of income by submitting two years’ worth of personal and business tax returns; bank statements; income deposits; profit and loss statements; and balance sheets.

    Notably, 1099 employees are assessed much more closely for creditworthiness than regular employees, and lenders will often have higher credit score minimums for self-employed individuals. Accordingly, an established and detailed credit history can significantly boost your approval chances, especially if you plan ahead and address potential credit history or credit score issues.

    Furthermore, lenders also view the lack of employee benefits as a negative mark against 1099 employees. For this reason, providing proof of health insurance or retirement savings can increase your creditworthiness.

    Overall, lenders prefer to keep debt-to-income ratios below 45% to ensure the long-term stability of the loan and loan repayment. That means that the borrower can spend, at most, 45% of their monthly income on all debt payments. As an example, if you already have a car loan and monthly payments that equal 10% of your monthly income, the maximum debt-to-income ratio you can secure for a mortgage loan is 35%.

    To increase your approval chances and fast-track your mortgage application, compile all required documentation ahead of time. The main mandatory documents required by lenders are:

    ♦ Profit and loss statement

    ♦ Balance sheet

    ♦ Proof of identification

    ♦ Tax returns

    ♦ Business registration documents

    ♦ Bank statements

    ♦ Credit reports

    ♦ Proof of assets

    Most lenders require borrowers to have at least two years of self-employment in their current field, role or industry. That said, 1099 employees with less experience may be able to replace one year of self-employment with two years of studies in the same or similar field.

    It can be harder to buy a home when you are a 1099 employee. Self-employed individuals will usually have to provide more documentation and go through additional verification steps to buy a house and secure a mortgage. Self-employed individuals will also have fewer lending options and will often pay higher interest rates than regular employees when obtaining traditional mortgages.

    One of the differences between obtaining a mortgage loan for 1099 employees and regular employes is the amount of documentation required. Namely, 1099 employees will usually require additional income and tax documentation to prove and reassure lenders of their financial stability and reliability.

    Plus, 1099 employees can benefit from including additional voluntary documentation [link to tips section] to improve their chances of approval, as well as potentially increase their debt limit. This could include verification letters from a licensed CPA confirming you’re self-employed; an up-to-date business plan in the case of independent contractors; or any off-season unemployment benefits for seasonal workers.

    The primary mandatory additional documents for securing a mortgage loan for 1099 employees are:

    Lenders will usually require two years of personal, as well as business tax returns at both the state and federal level. Make sure to include all forms and schedules (such as Schedule C or Schedule E).

    Profit and loss statements provide a snapshot of your business’ financial health and viability. Profit and loss statements show your income and expenses and provide lenders with an overview of the stability and profitability of your business.

    Balance sheets allow lenders to assess your overall financial state — which, in turn, allows them to determine your current and future ability to make mortgage payments regularly and on schedule. Note that balance sheets have to list all assets, equity and liabilities.

    A minimum of three to six months of bank statements will be required by lenders, but 1099 employees looking to increase their approval chances may submit bank statements going even further back (especially if they prove a sustained increase in income).

    Unlike regular W-2 employees, self-employed workers also have to submit business bank statements in addition to their personal bank statements. Moreover, it’s essential that all information is accurate and up to date as these documents verify the consistency and regularity of your income through your income deposits.

    Because these documents also show the full extent of your expenses, 1099 employees planning to apply for a home loan should carefully consider their expense underwriting totals and patterns. Specifically, a more frugal expensing approach may improve your overall debt-to-income ratio and thus also improve your chances of approval — and, potentially, your overall loan amount.

    It’s also crucial that self-employed individuals planning to apply for a 1099 mortgage loan list their personal and business expenses separately. Ideally, this is addressed by maintaining separate accounts and charging all expenses accordingly.

    The health and strength of your credit score can make or break your loan application. So, make sure that your credit score is accurate and as healthy as possible before you submit your application or even before you apply for pre-qualification.

    Lenders will request credit reports (or require the applicant to submit them) from all three major credit bureaus (Equifax, Experian and TransUnion) to review your credit score and credit history. Generally, a minimum credit score of 620 will be required, but it’s not uncommon for certain lenders or certain loan types to require a higher credit score.

    In the meantime, resolve any potential issues before applying; establish a pattern of timely bill payments; cut back on credit usage; and pay off as much outstanding debt as you can (such as credit card debt). Most important, do not take on any loans or open any new lines of credit before or during your application.

    A valid, government-issued identification document — usually a passport or driver’s license — is also required. In some cases, lenders may require that identification documents be valid for several additional months from the date of application.

    Self-employed individuals who operate through a registered business entity must provide additional mandatory business documents, such as:

    ♦ The articles of incorporation or the documents showing the creation of a partnership or a LLC (limited liability corporation)

    ♦ Copy of your business license

    ♦ Proof of business insurance

    ♦ State and federal permits (if applicable)

    Seasonal operators or gig workers like rideshare drivers, do not need to provide this additional documentation.

    Lenders will often require proof of additional finances and assets that can be used to cover regular mortgage payments or as collateral in the event that the 1099 employee’s main source of income ends. Most often, lenders will be interested in savings accounts and investment accounts, but they may also request or consider additional proof of assets, such as real estate holdings or rental income.

    Keep in mind that 1099 employees whose relatives or friends financially assist them in buying a home also need to include a letter of support (also known as a gift letter) that proves the existence, conveyance and origin of the finances. A gift letter also proves that the amount in question is not a loan and will not be required to be repaid.

    Yes, you can get a mortgage when you’re self-employed. In theory, most lending options available to regular employees should also be open to 1099 workers, although they will usually have to provide additional documentation.

    For self-employed workers, securing a mortgage loan is highly dependent on finding the right lender. Whether you decide to pursue a traditional, qualified mortgage loan or an alternative source of financing, carefully review and compare interest rates, qualification requirements, fees, closing costs and loan terms.

    In theory, 1099 employees are eligible for most home loans that regular employees can access. As such, 1099 employees shopping for a home loan can apply for conventional loans with private lenders or pursue a conventional government-backed loan. That means that 1099 employees can apply for:

    FHA loans are some of the most advantageous mortgage loans for 1099 employees because they require only a 3.5% downpayment. Only VA loans available for veterans provide better down payment scenarios.

    Because FHA loans are government-backed, most lenders view them as more reliable and safer than other loans, making it more likely to secure a mortgage. Even so, FHA loans will require additional documentation and verification. For example, the lender may contact your main client or clients to establish your continued employment, both past and future.

    Note that 1099 employees eligible for a VA loan should pursue this as a first option because it offers some of the most advantageous terms. Only current or former active-duty service members are eligible. Terms and requirements depend on the time served.

    In this case, 1099 workers eligible for a VA loan can secure one with no down payment because VA loans can be guaranteed up to 100% of the borrowed amount. Moreover, VA loans also have lower credit score requirements (ranging from 580 to 620).

    Similarly, USDA mortgage loans can also be an attractive option for 1099 employees because they usually have low interest rates and, like VA loans, don’t require a down payment. Plus, because these are guaranteed by the U.S. Department of Agriculture, they also come with the added security of government backing and will appeal to lenders as less-risky loans.

    Self-employed workers looking to obtain a USDA mortgage loan must ensure that:

    the intended home is located in an area designated as rural (which is true for the majority of the country)

    the home is a single-family residence

    the borrower has a low to moderate income, meaning their income does not exceed the area median by more than 15%

    the borrower has a credit score of at least 640

    the borrower provides two years of work history in their current 1099 role and field or the borrower has a minimum of one year of work history, predated by at least two years of regular employment in a similar role

    Fannie Mae and Freddie Mac loans are the most common types of loan among regular W-2 employees, but can be significantly more difficult for self-employed individuals to secure. That’s because they have far stricter approval requirements and government-mandated regulations. What’s more, they generally mandate a 10% to 20% down payment. Plus, 1099 employees usually face a much lower approval rating, especially in their first years of self-employment.

    The best mortgage for self-employed individuals will depend on the worker’s specific needs, requirements, and specificities, so it’s essential to research and shop multiple lenders to find the right fit for you. Overall, VA loans are some of the most affordable mortgages, while FHA and USDA mortgage loans will have smaller down payment requirements and lower-than-market-rate interest rates.

    If you can’t qualify for a traditional, conforming loan, you might consider exploring alternative mortgage loan options for 1099 employees. Keep in mind, however, that alternative loan types generally have higher interest rates; additional fees; and, often, stricter credit qualification requirements. Alternative mortgage loan options for 1099 employees include:

    Typically considered the best fit or self-employed workers, those earning a passive income, or unemployed individuals, non-qualified mortgage loans usually carry a higher interest rate, require added closing costs and necessitate a larger down payment. Non-qualified mortgages are also less strictly regulated than qualified home loans and may include extended loan durations (like more than 30 years), additional fees and balloon payments.

    The main benefit to non-qualified mortgage loans is that because they must follow fewer regulatory guidelines, they often look beyond credit scores and consider a wider range of sources of income.

    Created with self-employed individuals in mind, alternative income verification loans consider factors beyond your credit score. Specifically, they calculate your income and potential debt-to-income ratio by taking into account profit and loss statements; balance sheets; and bank statements.

    Unlike traditional loans that are based on tax returns, bank statement loans calculate your average monthly deposits and consider that as your monthly income to determine your loan eligibility and credit amount. These types of loans can be especially useful for startups because they generally operate at a loss from a tax return perspective, even if the borrower actually pays themselves a stable monthly salary.

    Self-employed workers with high expense write-offs will also find bank statement loans more attractive as they will consider the pre-write-off amount as the full income.

    Also known as passbook loans, share-secured loans are extended by lenders by putting a freeze on the equivalent of your full loan amount within your savings account. The frozen assets remain in your possession and continue to earn interest through the maturity of your loan. Then, frozen assets become gradually available again as you pay off your debt, which is usually done in monthly payments, just like traditional loans.

    One of the main benefits of share-secured loans is that they’re considered low-risk loans by lenders and, thus, generally have low, fixed interest rates (usually between 1% and 3%). Loan terms generally extend between two and 15 years, but differ from lender to lender, as do maximum loan amounts. For instance, some banks may loan the full equivalent of your savings account, while others will cap it a certain percentage of your savings.

    For most 1099 employees, personal loans will be insufficient to finance the purchase of a home but, nevertheless, they are an option. In fact, they can be a particularly viable option for high-income individuals, especially those earning passive incomes.

    If you’re looking to refinance an existing mortgage as 1099 employee, you can apply for a HELOC or a home equity loan if you have amassed significant equity in your home already. Put simply, these types of loans behave similarly to second mortgages and allow you to borrow against your ownership stake in your home, which they consider as collateral.

    The main differences between the two loan types are interest rates and monthly payments:

    ⇒ HELOCs have variable interest rates and monthly payments

    ⇒ Home equity loans have fixed interest rates and monthly payments that apply to the full maturity of the loan

    Otherwise, if both qualified mortgages and alternative sources of financing fall through, 1099 employees may be eligible for homeownership programs. Whether run by housing agencies or not-for-profit organizations, homeownership programs can offer down payment assistance and more affordable loan terms, among other things. The latter may include financial literacy programs or help putting together a financial plan that will improve your creditworthiness in the eyes of lenders.

    As is the case with any major financial decision, mortgages for 1099 employees have their advantages and disadvantages — from the potential of homeowners to deduct mortgage interest and property taxes to the limited lending options that 1099 employees can face.

      • Income flexibility
      • Tax benefits
      • Investment potential
      • Limited loan options
      • Higher interest rates
      • Stricter qualification standard

    None of these hacks alone can guarantee the success of your mortgage loan application as a 1099 employee. Yet, together, they can increase your chances, especially when they come as additions to successfully meeting other requirements. They can also potentially increase the overall credit amount extended to you by the lender.

    Minimize business deductions

    ⇒ Contribute a larger down payment

    ⇒ Secure a co-borrower or apply for a joint loan

    Hire a loan officer experienced with underwriting 1099 mortgage loans

    Shop around for lenders

    Prepare a business pitch

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