What is a 1099 Mortgage Loan?

Being your own boss can come with a lot of great perks: setting your own hours, chasing your goals on your terms. However, self-employed borrowers sometimes struggle to qualify for traditional mortgages. There could be many reasons for this on an individual level, but one common cause is related to income.  

Traditional mortgage options don’t always work for self-employed borrowers because lenders usually want to see forms of income verification that those borrowers don’t have. If that sounds familiar to you, then a 1099 mortgage loan might be worth considering.  

In this article, we will explain the 1099 mortgage, also known as the 1099 income loan, how it works, and some potential requirements to be aware of.

What is a 1099 Income Loan?

A 1099 income loan is a mortgage loan meant for independent contractors, freelancers, and other self-employed people. It’s called a 1099 loan because instead of asking for W-2 tax forms from borrowers to verify income, lenders who offer this loan type ask for IRS Form 1099. This loan type is not available from every lender.  

Generally, 1099 mortgage loans are considered non-qualified mortgages (non-QM). Non-QM loans are loans that don’t conform to standards set by the Consumer Financial Protection Bureau (CFPB). Typically, they have different underwriting standards that can sometimes create opportunities for borrowers to get a mortgage who may struggle to do so with a traditional loan.  

However, it is important to note that non-QM loans, including the 1099 mortgage loan, can come with unique risks to borrowers because they don’t conform with CFPB standards. For example, the CFPB has an “ability to repay” rule that non-QM loans don’t have to follow. So, if you’re looking for a 1099 loan, be extra diligent in making sure you can afford it.

How Does a 1099 Income Loan Work?

Basically, a 1099 loan works similarly to a regular mortgage, but there are important differences. As mentioned already, the lender would use your 1099 forms from the past one or two years instead of a W-2 as part of their income verification process.  

They would likely also ask for year-to-date earnings in the form of earning statements, pay stubs, or bank statements. This can be a helpful way to paint a clearer picture of how much a 1099 worker actually makes, as many self-employed workers use tax deductions to reduce their taxable income.  

Each lender may have different loan minimums and maximums available to borrowers, and the actual loan amount you might qualify for will vary based on your financial circumstances.

1099 Loan Requirements

The borrower requirements will vary from one lender to another. Also, it’s important to note that not all self-employed borrowers will qualify for a 1099 loan. They must still meet lender requirements.  

Depending on the lender, you may be able to get a 1099 loan for primary, secondary, or investment properties. However, requirements such as loan-to-value ratios could be different depending on the type of home you’re buying.  

In many cases, the lender will require that your 1099 income comes from a single source and that you are self-employed with the same employer for two years. This can make it challenging for newly self-employed borrowers to access this kind of loan.  

Finally, your credit score will come into play with this loan type, too. At The Federal Savings Bank, for example, we have 1099 loan solutions with minimum FICO® scores of 640, but that minimum score would require a maximum LTV of 75%, in that case.  

When considering your loan application, a lender will look at the totality of your financial circumstances to determine whether or not they will approve it.

Pros and Considerations

1099 mortgages can have unique benefits and drawbacks for borrowers. If you’re considering this loan type, you should carefully weigh both before making your decision. Here are a few examples of things you should think about with 1099 loans. 

Pros: 

• May be a mortgage option for some self-employed borrowers 

• Requires different income documentation than traditional mortgage options 

• Might help borrowers get a loan based on real income trends instead of reduced taxable income 

Considerations: 

• Not all lenders have 1099 loan solutions 

• Non-QM loans don’t conform to certain CFPB mortgage standards 

• Lenders may have stricter credit or down payment requirements, or higher interest rates

Final Thoughts

Just because you earn your living outside of a W-2 arrangement doesn’t necessarily mean you can’t buy a home. If your financial situation and self-employment history meet your lender’s requirements, you might be able to get a 1099 mortgage loan. Be extra careful that you can afford the loan if you go this route!  

With the right guidance and lender, the hard work you put into your self-employment might help you achieve your dream of homeownership, too. Consult with a licensed loan officer to review available options and determine eligibility.