1099 Mortgage for Independent Contractors
How Does a Home Loan for 1099 Consultants Work?
This type of loan has been long over due. The reason is because the number of self-employed workers in the U.S. is rising. This pool of workers includes, freelancers, gig economy workers, salespeople who are paid commissions, independent contractors who work from their home, a shared office space, or remote/virtual workers, and those who work in coffee houses.
Self-employed workers typically receive a 1099 at the end of the year to file on their tax returns. If you receive a commission or a fee for your service business and or receive a 1099-MISC or similar 1099 forms from companies this loan program may suit your needs.
This type of home loan for self-employed borrowers can be used instead of two years of tax returns and the popular alternative income loan without tax returns, the bank statement mortgage loan program. If you were denied a mortgage due to debt to income ratios from the bank or another mortgage company, check out this loan to use more of your income.
How is income calculated?
The lender will use 90% of the income documented on the 1099's and YTD income. So if your 1099 income reported for the last two years totals $220,000. Your income is $198,000 ($220,000 *.9), or $8,250 per month ($198,000/24 months).
According to the Bureau of Labor Statistics (BLS) from July 2019, there are 16 million self-employed workers. However, according to the IRS, there were 25.5 million sole proprietorships filed in 2016.
Requirements for a Purchase or Refinance
Copies of 1099 for the last 2 years: Your lender will want to see the Form 1099-MISC for each company for which you work for. If you don't receive this form due to not earning enough to meet the filing threshold, you may need to gather checks, bank statements and other proof of payment.
Document Year-To-Date (YTD) income through a recent bank statements or paycheck stub.
$880,000 purchase with a 15% down payment on a house in Irvine, CA as a primary residence
Loan amount of $748,000
First mortgage loan
30 Year Fixed at 5.25% = $4,130/month. You will need a co-borrower if your monthly income is $8,250 like the example above.
** conforming loan limit is $765,600 in Orange County
Advantages & Disadvantages
The interest rates are almost identical with the bank statement loan but you don't have to worry about verifying large deposits the lender may question or NSF's. A lot less paperwork. In some cases the rate is better than the bank statement program.
A disadvantage is the interest rate is higher than if you provided two full years of tax returns.
EXPERT TIP: if you are a digital nomad and work from various locations abroad, try to keep a U.S. address, preferably the same for the last two years on your 1099 forms.
Cash Reserve Guidelines
Contractors wil be required to show 3 to 6 months of principal, interest, taxes and insurance (PITI) in a liquid account for 60 days prior to closing.
Rates above are examples and may not be actual market rates.
- Los Angeles
- San Diego
- Long Beach
- San Jose
- San Francisco
- Thousand Oaks
- Colorado Springs
- Salt Lake City
1. Pew Research Aug. 2019 - Source