If you’re an independent contractor, you’re part of a big labor-force family that includes more than 10 million workers. This translates to 6.9 percent of the U.S. workforce, according to a May 2017 survey by the U.S. Bureau of Labor Statistics. With a collective financial footprint from 10 million people, it’s still a challenge for many independent contractors to get their foot in the door of homeownership. But even though you may have to jump over a few more hurdles than your friends who work for an employer, the matter of a little more paperwork may be the only thing that stands between you and the keys to your new home.
Independent Contractor Mortgage Loan Requirements
You won’t find a specific program that’s called an “independent contractor mortgage loan” because independent contractors apply for the same types of mortgages as other workers. The application process is the same, but the qualifying process is a little different. What makes a difference is that independent contractors are held to a higher standard of proving income than wage-earners and salaried employees.
Gross Vs. Net Income Challenge
For tax purposes, independent contractors can adjust their gross income by deducting their business expenses. These expenses reduce their gross income to a net income figure that potentially is much lower than their gross. And since they’re taxed on this adjusted income figure, independent contractors get a tax break by writing off their business expenses. But when they’re trying to qualify for a home mortgage loan, this lower income figure may negatively impact their debt-to-income ratio (DTI).
Through a Lender's Eyes
To mitigate their risk, mortgage lenders look to each borrower’s ability to repay the loan, which makes income one of the prime considerations for mortgage qualifying. It’s not just the amount of income but stability and, preferably, projected longevity. In other words, prime candidates will have sufficient, stable and long-term income. And since independent contractors generally have variable income, which may change because of the market or seasonal fluctuations, lenders may require additional paperwork to document a mortgage applicant’s income.
Proving Income to a Lender
Independent contractors don’t have employer-generated pay stubs and W-2 forms to substantiate their income. In part, contractors must rely on the 1099 forms that their customers or clients file with the IRS for income the contractors received during a tax year. When it comes time to qualify for a mortgage, independent contractors typically cannot simply produce a 1099 for mortgage lenders as verification of their income. Depending on the lender, an independent contractor may have to provide other sources of income documentation, including a profit and loss statement and a letter from their accountant, in addition to at least two years’ worth of tax returns.
Credit, DTI and Down Payment
Independent contractors must meet the same credit score, DTI and down payment requirements as other mortgage borrowers. To optimize your qualifying position, hold off on making any large credit purchases, such as vehicles, appliances or furniture, until after you’ve closed on your mortgage. These purchases could lower your credit score as well as increase your DTI.
And if you are able, make a large down payment, which can add an extra measure of assurance to a lender. U.S. News & World Report notes that a down payment of 30 percent or more can push a mortgage toward approval status if income qualifying is otherwise a close call.
Assembling a Robust Paper Trail
If you’re an independent contractor, you can absolutely get a home loan if you meet the qualifying requirements. You just may have to provide your lender “above and beyond” the standard documentation that’s required of other mortgage applicants. But if you keep good business records and you assemble a robust paper trail to prove your income, the rest of the mortgage qualifying process is virtually the same as it is with other borrowers.
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References
Writer Bio
Victoria Lee Blackstone was formerly with Freddie Mac’s mortgage acquisition department, where she funded multi-million-dollar loan pools for primary lending institutions, worked on a mortgage fraud task force and wrote the convertible ARM section of the company’s policies and procedures manual. Currently, Blackstone is a professional writer with expertise in the fields of mortgage, finance, budgeting and tax. She is the author of more than 2,000 published works for newspapers, magazines, online publications and individual clients.
FAQs
Without a regular paycheck or W-2 statement, it can be harder to prove how much you make, and how reliably you make it. That's why most lenders have stricter rules for self-employed borrowers. Just because you work for yourself doesn't mean you're guaranteed to have a hard time getting a mortgage, however.
How do you get a home loan when you are a 1099? ›
1099 Mortgage Loan Requirements Include:
- The last six months of 1099 income, less if 1099 income is from most recent employer.
- Documentation of year-to-date income.
- 680 minimum credit score.
- Minimum 15% down with mortgage insurance approval.
- A minimum loan amount of $175,000 is required to apply*
Since 1099 mortgage loans are perceived as riskier for the lending institutions than traditional mortgages, lenders often require would-be borrowers to have higher credit scores (at least 620 and over) and lower debt-to-income ratios than typical mortgages (typically 50% or less DTI.)
How many years of 1099 do you need to buy a house? ›
Most traditional mortgage programs require two years of 1099 income and tax returns for self-employed borrowers; however, there may be some instances where a 1099 borrower may be able to get approved with only one year of 1099 income documented.
Can I get a FHA loan if I'm self-employed? ›
Getting an FHA loan while self-employed is possible. While there are additional standards to pass compared to what the average employee faces, FHA loans are available to business owners as well. This guide can help you prepare for your FHA loan application as a self-employed person.
Can I get a FHA loan with a 1099? ›
When you apply for your FHA mortgage, typical documents the lender will ask to receive include: Paycheck stubs. W-2 or 1099 forms. Tax returns from the last two years.
Can I buy a house with a 1099 A form? ›
If you understand trust law, basically the IRS is your trustee and you're the beneficiary. The IRS is the public servant, it supposed to surve you by getting you what you need, an 1099a will give you the ability to buy a house or a car or other things as well.
What are the 4 C's of loans? ›
It binds the information collected into 4 broad categories namely Character; Capacity; Capital and Conditions. These Cs have been extended to 5 by adding 'Collateral', or extended to 6 by adding 'Competition' to it (Reference: Credit Management and Debt Recovery by Bobby Rozario, Puru Grover).
Is it better to buy a house with a W2 or 1099? ›
When obtaining a mortgage, lenders assess your ability to repay the loan by examining your income stability and consistency. While having a W-2 job offers a more straightforward path to demonstrating stable income, having a 1099 income as a self-employed individual or independent contractor can be equally valuable.
Can I buy a house with 1 year of 1099? ›
FAQ's. Can you get a mortgage with 1099 income? Yes, 1099 earners can use 1099 earning statements or bank statements to qualify for a loan. This loan option helps those who cannot verify income based on tax returns.
Mortgage lenders typically use net income when assessing self-employed borrowers for home loans. Net income is the amount earned after deducting business expenses, taxes, and other deductions from gross income.
How do I show more income for my mortgage? ›
A few easily overlooked sources of income include alimony, child support, disability income, Department of Veterans Affairs (VA) benefits, retirement benefits, side hustles, and bonuses. If your household receives any of these types of income, you may be able to include it on your application.
How long after starting a business can you buy a house? ›
You can get a mortgage on your home even if you've been self-employed for less than 2 years. Ultimately, your business must be active for at least 12 consecutive months. And your most recent 2 years of employment (including salaried work and other forms of income in the same line of work) must be verified.
How does FHA calculate self-employment income? ›
The Mortgagee must analyze the Borrower's tax returns to determine gross Self-Employment Income. Requirements for analyzing self- employment documentation are found in Analyzing IRS Forms (Appendix 2.0). previous one year. previous six months after the COVID-19 Related Economic Event.
Do independent contractors get 1099 at end of year? ›
Form 1099 is used to report certain types of non-employment income to the Internal Revenue Service. Certain types of non-employment income for freelance and independent contract work must be reported on a 1099–NEC. The deadline to mail 1099s to taxpayers is usually January 31.
What is the easiest mortgage for self-employed people? ›
Self-Employed Mortgage Options
FHA loans are designed for low-to-moderate-income borrowers. They require a lower minimum down payment—as low as 3.5%—and lower credit scores than many conventional loans.
What are two cons of being an independent contractor? ›
Cons of Being an Independent Contractor
- Income Variability and Uncertainty: Financial Peaks and Valleys. ...
- Lack of Benefits and Security: The Benefits Conundrum. ...
- Responsibility for Administrative Tasks: Balancing Work and Admin. ...
- Limited Employer Protections: Legal and Contractual Challenges.
No Employer-Provided Benefits
When you're an IC, you get no such benefits. You must pay for your own health insurance, often at higher rates than employers have to pay. Time lost due to vacations and illness comes directly out of your bottom line. And you must fund your own retirement.
Can I get a loan if I am self-employed? ›
It's possible to get approved for a personal loan when you're self-employed, but lenders will likely put your finances under a microscope to make sure you earn enough income to keep up with payments.
