Home Loans for 1099 Earners
The landscape of how professionals earn their livings has changed a great deal in recent years – especially during the pandemic – and more and more people are working as freelancers, independent contractors, or vendors than ever before. But while this type of work can offer flexibility, independence, and result in a rewarding career, it can also make some aspects of life that nine-to-fivers take for granted slightly more difficult, such as when it comes to acquiring home loans.
Home Loans for 1099 Earners
If you’re self-employed and looking to buy a home, you’ll actually find that you will be eligible to apply for loans “traditionally” employed borrowers can; you will not be inundated with special requirements when compared to other applicants, and you will be held to the same standards for credit, debt, down payment, and income.
However, you will have a few extra hurdles to clear in the form of having to properly document your exact income, which can be difficult for business owners, contractors, gig-workers, and freelancers as this process typically involves a great deal more paperwork than for standard W-2 workers. But as long as you successfully meet all of the standard loan requirements and can establish that you have steady, reliable income, being self-employed should not serve as a barrier in successfully getting a home loan, or refinancing an existing one.
The majority of lenders typically require two years of stable, consistent, and ongoing self-employment – defined by lenders as someone who is not a W-2 employee, or who has at least 25 percent ownership in a business – to qualify for a home loan. There are occasional exceptions to this rule, however; some lenders will accept one year of self-employment combined with one year of formal education or training, in addition to other scenarios.
Also, your income must appear likely to continue for at least three years after loan closing; a history of declining income may weigh against you.
In addition to establishing employment history, self-employed borrowers also need to meet the standard requirements that would be expected of any home loan. While requirements vary by the type of loan, borrowers can expect to have to provide their credit score, credit history, current debts, and liquid savings and assets. The type of property and whether or not it will be used as a primary residence, vacation home, or investment property will impact the type of mortgage and interest rate you qualify for.
This brings up an important point- lenders only count taxable income toward your mortgage. This can be where things start to get complicated, because lenders will use your taxable income as a base for their calculations, and add back certain deductions that do not represent actual expenses that would be taken from your bank account. However, not all deductions will qualify, so while many business owners and freelancers will take as many deductions as they can to save money in the short-term, they may find it comes back to bite them when applying for a home loan.
A small amount of self-employed borrowers can circumvent this issue by utilizing what is known as a “bank statement loan,” which bases your qualification upon the total amount of funds being added to your bank account as opposed to income tax returns. But these loans are considered non–qualified (non–QM) mortgages and thus lack some consumer protections that standard loans have; in addition, they often have higher interest rates than mainstream loans do.
And here’s a further complication when you’re self-employed – properly documenting your income. Lenders will normally require numerous documents when you’re applying for a loan in order to verify your income, including:
- Two years of personal income tax returns
- Two years of business tax returns, including schedules K–1, 1120, 1120S
- Business license
- Year–to–date profit and loss statement (P&L)
- Balance sheet
These documents can be prepared by any Certified Public Accountant (CPA), accountant, or tax preparer, perhaps all in a single day. And if you are applying for a jumbo loan – a larger loan for higher-priced properties – you will need to provide a letter signed by a CPA confirming that you’re still in business.
If you are the sole proprietor of your business – as opposed to a partnership, corporation, or S corporation – providing your business tax returns may not be required. And if you have been self-employed for five years or more, you may only be required to provide one year of personal/business returns, as opposed to two.
Generally, if your income is not regular and stable, lenders will normally count that against you; however, some take into consideration that businesses can ebb and flow, and in that care they may ask you for more than two years’ worth of tax returns to confirm that your income is overall steady.
Additionally, if you are a W-2 worker who has a side gig – for example, working freelance for a ride-share service – your income derived from side self-employment doesn’t always have to be reported when applying for a home loan. This provision normally pertains to retirement income, social security income, pension payments, and/or dividends as well.
Other than the extra work that goes into applying for them, all main mortgage programs are open to self–employed borrowers, including conforming loans (those backed by Fannie Mae and Freddie Mac) and government–backed FHA, VA, and USDA loans.
