Guide for Schedule C self-employed borrowers.
Use your 1099-NEC Form to Get a Loan
As an alternative to the standard mortgage documentation requested by banks for loan approval, independent contractors have another non-qm loan option to use instead of bank statements to close their purchase or refinance transaction. Mortgage brokers have lenders who will verify your income through your official 1099-NEC statement along with a YTD profit & loss by your tax preparer. There is no requirement to review tax returns or transcripts.
Similar to the bank statement loan's rate, minimum credit, LTV requirements, and property useage this product requires even less income documentation.
While approval is possible with just one 1099-form if you buy a home in January or February, most non-QM lenders will require a year-to-date profit & loss statement to firmly calculate your average monthly income.
|30-year Fixed Loan Type
|The loan scenario above is for a borrower with a 740 or higher middle credit score financing a primary home using their personal bank statements or 1099-NEC. Debt ratios over 50 do not qualify.
1099 form - The independent contractor proves their monthly income from their recent IRS 1099 than with the AGI on their tax returns or years worht of bank statements.
|Low market rate
|approx. 1-2% above conv. rates
|approx. 0.125-.25% above bank statement rates
A mortgage based on a 1099 non-employee compensation form is best for self-employed borrowers and contractors earning an income that is not salaried, is consistent every month, or if inconsistent can prove for the last 2-3 years that large or zero deposits are the norm some months. Here are some reasons to not use the bank statement loan and when to use a 1099 for income verification.
Sheryl is graphic designer working for several companies. The bulk of her income was reduced for a few months from one of the companies she create designs for. She had 10 overdraft fees just before applying for a bank statement mortgage.
This decline in income and recent overdrafts was why the first lender declined her. Kelly applied for a 1099 income mortgage two months later when her finances were in better shape and got approved.
- No 1040 Income Tax Returns. This loan offers independent contractors and 1099 paid employees the opportunity to qualify for a home loan using their 1099 forms. This means no requirement for IRS tax forms. Just one or two statements are needed instead of 12 or 24 bank statements where underwriters and the income division heavily scrutinizes deposits which may require an explanation.
- Down payment. Although bank statement loans offer qualified self-employed borrowers a 10-percent down payment, the 1099-NEC mortgage loan requires 15-percent down.
- Interest rate. The interest rate is higher than the bank statement loan by approximately .125-0.25% usually due to the applicant's middle credit score and loan-to-value.
For borrowers who have concerns about qualifying for a bank statement mortgage or simply wish to consider alternative non-QM loan programs, there are several other specialized financing solutions available that utilize more flexible income calculations and verification methods.
- Another income verification option is the Profit and Loss (P&L) mortgage. It works by getting your certified professional accountant or licensed tax preparer to prepare a P&L that is signed by you & the CPA. Some programs only need your signature but will likely have higher rates. For the most part, interest rates are similar to the 1099 mortgage or .25% higher than the bank statement loan. This loan offers a clear picture of your cash flow and earnings for the underwriter.
A second choice involves an asset-based loan that enables you to qualify by utilziing your account balances of liquid assets you own instead of qualifying with self-employment or salaried employment. The requirement is your assets must be adequate to qualify. Normally that means 5- to 7 years worth of the new mortgage payment in qualifying assets. Learn more about the asset utilization program here
Typical questions borrowers also ask about this loan product
The lender will use a maximum of 90 percent 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)
The lowest middle credit score necessary for approval is 660 for most lenders who offer 1099 only mortgage loans. If you have a middle score of 760 or higher you likely be able to get the best possible loan terms and rates.
You may use all of the income reported on your forms as long as they can be proven to be associated with your profession or industry.
Example: 1099's from Google, Tik Tok, Facebook, Instagram etc. will be combined and averaged for your monthly income.
Another example is a realtor who has their commissions from sales and rentals on different 1099 forms or works for several companies.
The number of months is typically 3- to 6-months depending on the loan amount and credit score.
You will need copies of:
1. View the disclosure disclaimer regarding loan approval, loan product availability and qualifying for a loan. Not All borrowers will qualify.