Yes, getting a mortgage if you are self-employed/1099 is very possible, and no, it doesn’t need to be stressful. Whether you’re just getting started on this exciting new process towards homeownership, a current homeowner looking to purchase another property, or thinking about homeownership as something for down the road, you’ve come to the right place.
Navigating the path to homeownership can be both thrilling and sometimes daunting for those who march to the beat of their own entrepreneurial drum. When you're self-employed or working on a 1099 basis, it’s important to take a strategic approach and have a thorough understanding of your mortgage options.
Today, we will explore tips to obtaining a mortgage when you’re self-employed/1099, qualifying factors, potential challenges and how to combat them, loan options for self-employed/1099 and more.
Getting A Mortgage When You’re Self-Employed/1099: Four Steps
If you are self-employed/1099, the loan approval procedure for obtaining a home loan will necessitate furnishing specific documentation to substantiate your income from self-employment, or your contract work if you are 1099, and will require you to explore lending options that you might not be as familiar with. The good news is that we know these lending options very well here at Defy Mortgage. Let’s take a look at the first 4 steps to get a mortgage when you’re self-employed/1099:
- Get pre-approved
Start with pre-approval, and if you need help, we’re here. Get pre-approved for a mortgage before house-hunting. These documents clarify your creditworthiness and affordability. Pre-approval letters provide you, your real estate agent, and sellers with an idea of your financial situation and provide confidence that you’ll be able to fulfill the obligations you take on when buying a home. You don’t want to skip this step.
- Determine if you’re classified as self-employed/1099
If you own a business (at least 25% or more) or have one partner, you will be considered self-employed. If your earned income is verified by 1099 forms, rather than W2s, you’re likely to be considered a 1099 contract worker – also sometimes called a “freelancer” or “independent contractor.” Feel free to check out our recent self-employed/1099 market report, HERE.
- Gather necessary documents to show lenders
Every lender has different ways that they qualify borrowers. When it comes to us at Defy, offer a variety of loan options for self-employed/1099 borrowers with options for no tax returns, 1099s, or bank statements. We will get more into specifics about these options below.
- Consider a non-qualified mortgage lender
The crucial aspect lies in providing more adaptable documentation choices for 1099 contractors and self-employed borrowers. Non-QM loans represent mortgage products tailored for individuals who may not meet the stringent requirements of traditional Qualified Mortgages (QM). These loans are particularly designed to accommodate self-employed borrowers by taking into account various factors for approval, such as bank statements.
Applicants can utilize these statements as evidence of income instead of relying on conventional proof of income like tax returns or CPA-prepared profit and loss statements. Additionally, Non-QM loans offer the flexibility of interest-only payment options.
This flexibility proves advantageous for those with irregular income streams or substantial deductions on their tax returns resulting from business write-offs.
At Defy, we provide bank statement alternatives with LTVs of up to 90%, accepting FICO scores as low as 600 (with reduced LTV). We offer loans of up to 4 million dollars under this option. With our bank statement feature, you can qualify using 12-24 months of statements and still manage your taxes in a manner that suits your circumstances. More on bank statements here.
Qualifying For A Mortgage When You’re Self-Employed/1099
The exact criteria you’ll need to meet to get approved for a self-employed mortgage will vary, depending on the lender. When a lender is reviewing your mortgage application, they may consider the following:
- The stability of your income (personal and business)
- Business expenses
- Business history and the length of business history
- Employment consistency
- Credit score
- Debt-to-income ratio
- Total loan amount
Factors That Can Present Qualification Challenges If You Are Self-Employed/1099
Securing a mortgage as a self-employed individual can present greater complexities compared to a conventional W-2 income recipient. Typically, this scenario necessitates an extensive array of documentation to verify financial stability and loan repayment capacity. These documents may not always offer a comprehensive view of the financial situation and are challenging to piece together.
At Defy, we understand these intricacies and excel in expediting the process, ensuring a clear understanding and – in most cases – the successful attainment of your financing goals.
Demonstrating a consistent ability to repay a loan is key. Lenders prefer stable, predictable income streams.
Income pattern changes:
The sale of a business with income streams that have recently changed, for instance. Or, some self-employed individuals, such as those in seasonal businesses or industries with cyclical income, have irregular earning patterns. A bank statement option is a great alternative for these situations, as they require less documentation and payment terms that tend to be more flexible.
Difficulty proving business expenses:
This is why exploring alternative loan options in the Non-QM space, like P&L options that accurately reflect the income of self-employed individuals and business owners by accounting for deductible business expenses, is encouraged. Self-employed individuals often have deductible business expenses that reduce their taxable income. While this can be advantageous for taxes, it may also make it appear as though their income is lower than it is when applying for a loan.
Short business history:
Lenders, like us at Defy, may require a certain length of business history to establish stability. Borrowers must be self-employed for at least two (2) and the business must be in existence for at least two (2) years.
Limited or inconsistent employment documentation:
Traditional employees can provide pay stubs and W-2 forms as proof of income, whereas self-employed individuals or contract workers may need to rely on tax returns, 1099s, or other financial documents.
High debt-to-income ratio:
At Defy, we have the ability to be very flexible when it comes to debt-to-income ratios and can go way beyond what traditional lenders can do.
Mortgage Loan Options for Self-Employed/1099
Bank statements are used to qualify, as opposed to W2s or tax returns. In turn, this makes for a faster loan process. Typically, borrowers are expected to provide 12-24 months of bank statements in order to demonstrate cash flow and income.
Benefits of Bank Statement Loans
- They can be used to purchase several types of properties including primary, secondary, and investment properties
- Fewer loan requirements (no tax returns)
- They have flexible payment terms
- Tend to be approved faster than traditional options
- Borrowers can often qualify for higher loan amounts than with traditional loans
Bank Statement Loans with Defy Mortgage
- Personal/Business Bank Statement Docs
- Up to 90% Loan to Value (LTV)
- Minimum FICO of 620
- Loan amounts up to $6M+
- 12-24 months of statements
- No tax returns required
A P&L loan solely necessitates the submission of a profit and loss statement prepared and signed by a Certified Public Accountant. Unlike a traditional mortgage, with a P&L, there is no need for income documentation such as tax returns, W2s, 1099 forms, or even bank statement deposits reflecting the past 12 months.
Benefits of Profit & Loss Statements
- Fewer loan requirements (no tax returns, no W2, no 1099s, no bank statements)
- Simple and streamlined loan eligibility process
- Rate structure options
Profit & Loss Statements with Defy Mortgage
- No tax returns, 1099s, or bank statements
- Up to 90% LTV
- 30-year fixed, adjustable, interest-only options
- Down to a 600 FICO (reduced LTV)
- Loans up to $6M
- Must be self-employed for at least 2 years
- Business must be in existence for at least 2 years
Interest-only loans (IO mortgages) are ARM loans that allow borrowers to pay only the interest on the loan for a set period of time, with fixed rates and no requirement for a principal paydown. Following that period, you can either refinance, pay the remaining balance in full, or begin making regular monthly payments. These loans help by giving you the flexibility to pay the loan down as you see fit with the ability to manage your cash flow as they have a smaller required payment.
Benefits of Interest-Only Loans
- Fixed rates and flexibility to manage cash flow discussed above
- No requirement for a principal paydown, in turn, making monthly payments lower
- Borrowers can minimize their payments if desired; that way, they can pursue other investments
- Pay only the interest on the loan for a set period of time (up to 10 years!)
Interest-Only Loans with Defy Mortgage
- Loan amounts up to $10M+
- Up to 85% LTV
- Interest-only fixed rates of 5/7/10 yrs
- No requirement for a principal paydown
- 30-year or 40-year loan amortization
- Primary, second, investment properties
Top Questions To Ask Your Lender If You Are Self-Employed/1099
When you're self-employed or working as a 1099 contractor and seeking a mortgage, it's crucial to gather all the necessary information and ask pertinent questions to ensure you understand the process and requirements.
Do you offer loan programs specifically for self-employed borrowers?
Some lenders offer specialized loan programs for self-employed borrowers. Take us at Defy for example. Our comprehensive AlternativeAsset product set is perfect for self-employed/1099 individuals with options for no tax returns, loans up to $10M, no application fee or obligation, 24/7 white-glove 1-on-1 service from your personal mortgage consultant and more.
Inquiring about these options can help you choose the most suitable mortgage product for your situation.
What are the qualification requirements and criteria for self-employed/1099 borrowers? (inclusive of any income stability and history requirements)
It's essential to know the specific criteria and requirements you must meet as a self-employed borrower. This might include credit score thresholds, debt-to-income ratios, down payment requirements, total years in business and other eligibility factors.
How do you calculate my income and determine loan eligibility as a self-employed/1099 worker?
Different lenders may use varying methods to calculate income for self-employed individuals. Understanding how they calculate your income helps you anticipate the loan amount you may qualify for and plan your finances accordingly.
What documentation is required for self-employed individuals like me to secure a home loan/approval?
Get a clear list of necessary documents such as tax returns, credit history, and employment verification. Mortgage applications require various documents, such as tax returns, pay stubs, bank statements, and more. Ask the lender for a clear list of all the documentation they'll need from you to process your loan application smoothly.
Your loan type will also impact which documents are necessary for approval – such as income statements, credit history, and employment verification. Some loans, under the Non-QM umbrella, for example, don’t require tax returns, employment, or income verification.
What is the downpayment requirement?
This is key to ask as it’s the initial payment that you will need to make toward the purchase of a property. The specific down payment requirement will depend on the mortgage program, the lender's guidelines, and your financial situation. Discuss your options with your mortgage lender to determine the most suitable down payment amount based on your individual circumstances.
Can you provide an estimate of the interest rate and potential loan terms for my situation?
Understanding the interest rate and potential loan terms helps you evaluate the affordability of the mortgage. Different lenders might offer varying rates and terms, so getting estimates from multiple lenders allows you to compare and choose the best option.
Can you provide guidance on improving my mortgage eligibility as a self-employed borrower?
Your lender should be able to provide you with the resources and support you need as your lending partner in this process. If you’re interested, schedule a complimentary one-on-one call with a dedicated Defy mortgage consultant right here, to discuss your options. No obligation ever.
Here at Defy, we aim to provide you with unwavering support in navigating the mortgage process – empowering you to make well-informed and confident decisions as a 1099 contractor, entrepreneur, or self-employed professional.
We are here to assist you at every step and eagerly await to help get you started.