All The Trends, Tips, and Factors For Entrepreneurial, 1099 Contractors & Self-employed Borrowers To Consider

Introduction

In the ever-evolving landscape of the real estate market, there’s a distinct buzz surrounding 1099 contractors & self-employed borrowers and entrepreneurs seeking to purchase a home or refinance their current mortgage. 

As we stand at the intersection of economic shifts, technological advancements, and changing work dynamics, the way we approach real estate, homeownership and obtaining a home loan is transforming. 

In this blog post, we will delve into the following topics:

• The rise in popularity of self-employment and contract work
• The current state of the real estate market for 1099 contractors & self-employed borrowers 
• Emerging trends driven by entrepreneurial individuals looking to make a property purchase or refinance
• Real estate markets catering to the needs of entrepreneurial, 1099 contractors & self-employed borrowers 
• Factors to consider when making that all-important purchase or refinance decision, including challenges
• Tips for 1099 contractors & self-employed borrowers looking to purchase or refinance

As we embark on this exploration of the self-employed real estate landscape, we’ll take a close look at the emerging trends that are shaping the choices and preferences of these enterprising buyers. We’ll uncover the strategies they employ to successfully navigate the complex world of real estate transactions while balancing their entrepreneurial endeavors. 

Additionally, we’ll identify the hotspots in the real estate market where self-employed homebuyers are finding opportunities, whether it’s bustling urban centers or picturesque suburban neighborhoods, and key factors entrepreneurial, 1099 contractors & self-employed borrowers should keep in mind when embarking on their real estate journey. 

The Rise in Popularity of Self-Employment and Contract Work

The concept of ‘work’ and ‘home’ has undergone a remarkable metamorphosis over the past few years. Increasingly, individuals are seizing the opportunity to become their own bosses, set their own schedules, and shape their own destinies as 1099 contractors & self-employed borrowers or someone with several income streams. 

Over the last few years, we’ve seen a significant surge in the number of self-employment as individuals sought flexibility and alternative ways to secure their livelihoods amidst economic uncertainty. As traditional job markets faced disruptions, flexibility became a luxury and job security dwindled, many turned to freelancing and entrepreneurship. 

According to a report by Upwork, a leading freelance platform, since 2020, there has been a “25% increase in the number of freelancers in the United States with similar trends observed globally.”  

Additionally, a study conducted by MBO Partners revealed that the number of independent workers in the U.S. reached 51.1 million in 2020, reflecting a growing inclination towards self-employment. 

With this entrepreneurial spirit comes the desire to secure not just a place to live but a strategic asset – a home that aligns with both their personal and professional goals. In this dynamic context, the real estate market and mortgage industry is witnessing a surge in demand from 1099 contractors & self-employed borrowers/homebuyers who are navigating their unique financial journeys.

The Current Market State for 1099 Contractors & Self-Employed Borrowers

With the growing gig economy and an increasing number of people working as freelancers and contractors, lenders have been adapting to accommodate this segment of borrowers. Sources like the National Association of Realtors (NAR) indicated that some lenders, much like us at Defy Mortgage, have developed specialized mortgage programs for self-employed individuals to make the home-buying process more accessible. 

At Defy, for instance, we focus on assessing a borrower’s overall financial stability – not solely relying on traditional income verification methods – offering several Non-QM options like Interest-Only, Bank Statements, and Profit & Loss in our AlternativeAdvantage product set for our 1099 contractors & self-employed borrowers.

Emerging Trends Driven by Entrepreneurial Individuals Looking to Purchase a Property or Refinance

When it comes to trends on the real estate front, at-home offices are becoming more of a “non-negotiable” during house-hunting and when contemplating renovations. With more flexible working environments having pushed work to move completely remote, people are far more comfortable at connecting through technology and much more receptive to the idea of having options when it comes to where you get your work done. Millennials and Gen-Z homeowners and buyers, for instance, are less enamored of conventional workplaces than their older Baby-Boomer colleagues, and surveys show them to be more interested in realizing a rewarding work/life balance. 

So what does this mean? A few things trend-wise to keep an eye out for: 

1. A work anywhere, live anywhere mentality 
2. The steady rise of the gig economy (resulting in more self-employed individuals looking to purchase)
3. Elevated popularity for alternative home loan options  
4. At-home office spaces

Real Estate Markets Catering to the Needs of Entrepreneurial, 1099 Contractors & Self-employed Borrowers

Warmer climates: Working from home while enjoying the Sun year-round? That sounds lovely. State markets we see booming for this reason: Florida, Texas, Tennessee, Arizona

Suburban living: Some self-employed prefer a more suburban or rural environment. Reasons for this vary but are not limited to: opportunity to afford more space for a home office, location to school systems for parents who are self-employed, more land for outdoor spaces, etc. Markets we see booming for this reason: Aurora (CO), Chapel Hill (NC), Charleston (SC), Concord (NC), The Woodlands (TX), Sandy Springs (GA)

Factors to Consider When Making That All-Important Purchase or Refinance Decision, Including Challenges

Factors for entrepreneurial, 1099 contractors & self-employed borrowers to consider when looking to secure a home loan or purchase/refinance:

Explore Non-QM Options & Non-QM Lenders

The key here is more flexible documentation options for 1099 contractors & self-employed borrowers. Non-QM loans are mortgage products designed for borrowers who may not meet the strict criteria of traditional Qualified Mortgages (QM). These loans often cater to self-employed borrowers by considering alternative factors for approval, such as bank statements, which allow applicants to use their bank statements as proof of income instead of traditional tax returns, profit & loss statements, prepared and signed by a CPA, and interest only options. 

This can be beneficial if you have irregular income streams or significant deductions on your tax returns due to business write-offs. At Defy, we offer bank statement options with up to 90% LTV, down to a 600 FICO (reduced LTV) and Loans up to 4M. With our bank statement option, you can qualify with 12-24 months of statements and still do your taxes however you see fit. 

Understand what can be challenging for people that are self-employed from being able to qualify for a loan.

Obtaining a home loan when you are self-employed can be more challenging versus a straight W2 wage earner. In many cases, various documents may be needed to ensure the financial stability and ability to repay the loan. Oftentimes, these documents do not provide the full picture and are challenging to piece together. At Defy, however, we understand and can help get clarity quickly and in most cases accomplish our mutual objectives – obtaining your financing!

Irregular income: Demonstrating a consistent ability to repay a loan is key. Lenders prefer stable, predictable income streams.

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. 

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.

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. 

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 actually is when applying for a loan. 

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.

Tips for 1099 Contractors & Self-Employed Borrowers Looking to Purchase or Refinance

To improve chances of qualifying for a loan, the following steps can be taken:

• • 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. Don’t skip this.
  • Educate yourself: It’s crucial for you to educate yourself about all things mortgage and the internet is a great place to start. At Defy Mortgage, we have a variety of different educational resources to help you throughout your purchasing journey, including blog posts, mortgage calculators, tips on social media and more.
  • Maintain organized financial records: Keep detailed records of income and expenses to provide lenders with accurate documentation.

• Consider alternative lending options (Non-QM): Understanding your options is crucial. Selecting the one that aligns perfectly with your financial and personal goals is key and we can help guide you in the right direction. 

• Build a strong credit history: Establish and maintain a good personal and business credit history by paying bills on time and managing existing debts responsibly.
• Increase income stability: Work on stabilizing your self-employment income through diversification, client retention, or contract agreements.
• Show a consistent pattern of profitability: Lenders want to see that your business is consistently profitable and has the potential to continue growing.
• Consulting with a financial advisor: Having a conversation with a financial advisor or CPA can provide valuable guidance in navigating, understanding and improving your finances.

Yes, purchasing a home or refinancing are likely some of the the biggest financial transactions of your life – but it doesn’t need to be stressful or this difficult. Here at Defy, we want to ensure you make confident and informed decisions and are here to assist you with navigating the mortgage process as 1099 contractor, entrepreneur and/or self-employed individual.

We aim to provide actionable insights and practical advice to empower you, the homebuyer or homeowner, to make informed decisions and achieve your homeownership goals in this exciting and evolving market. 

If you’re ready to go, start your purchasing or refinance journey here. No matter what stage you’re at, we are always here to help you.