Mortgages & Housing Overview

Life is sometimes full of changes and challenges but buying a house does not have to be.  Sometime a 1099 contract person also desires a change of pace or location from their permanent residence.  That person should not feel intimidated just because they are technically “self-employed” by IRS standards.  Here are some good pointers and information on how one should look at purchasing a home as a 1099 employee.

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Qualifying, as a 1099, on just your income

This can be an easy process for some and will depend on your specific financial situation.  However, there are some things you can do to make this easier—especially if planning ahead.  Most mortgage lenders want to see evidence of 2 years of income as a 1099 employee.  

If your fortunate to have a 2-year contract, that’s helpful, because you’re past earning won’t matter.  Generally speaking mortgage lenders will want to know if the year-over-year income is increasing, or not.  There calculations are based on underwriting calculations to determine the realistic estimate of your monthly qualifying income.  If income is not rising, the income basis will be based upon your lower income, when comparing the last 2-year tax returns.  Inversely, income basis will be an average, if your income is higher in the most recent year.  

If you file extensions annually, you should know that your taxes will need to be filed/paid and up to date.

For those wanting to see inside the mortgage lenders calculation more in depth:  The math is simple.  Just look at your “Schedule C” within your federal tax returns for the last 2 years.  Then add 2 lines together.  Line 13 (Depreciation) + Line 31 (Net Profit or Loss).  That divided by 12 months is the monthly qualifying income Then if your most recent year is higher, then average the past 2 years.  If your most recent year is lower, then average just that year to determine qualifying monthly income.

qualifying with a W-2 wage Earner 

If you are a W2 employee the calculation is much simpler.  The mortgage lender will use your salary divided by 12 months to determine your qualifying income.  If you are hourly (instead of salary)—they will use your hourly wage X 40 hours per week X 52 weeks per year.  The resulting number is then divided by 12 months to calculate your monthly qualifying income.

If you have less than 2 years as a 1099 but have a spouse that earns enough in W2 wages—then the loan can be based on their income alone.

qualifying based on length of contract

Generally, a contract of greater than one year (or more) when a W2 or 1099 employee may be accepted.

One should note that either 2 or 4 weeks’ worth of paychecks from the employer may be needed (before being able to close on the house) to ensure employment has seasoned 30 days.  2 weeks for a conventional loan.  4 weeks for FHA.  One exception to this rule is VA.  VA loans require evidence of a guaranteed employment contract with a reasonable start date (within reasonable proximity closing on the home).

Other Options

We have been discussing what larger banks/mortgage lenders expect.  

There used to be many local banks and credit unions that had more lenient lending (especially useful for those with 1099 earners) with less than 2 years income evidence or no employment contract.   Ever since the mortgage crises (2008) those loans have mostly gone away.  Although a few might still exist, the requirement won’t be dramatically different than the big banks.  The rule of two-tax-years will still be required but the smaller bank/credit union might be more lenient, based assets or collateral.    Taxes will still have to be filed/paid and up to date.

You should talk in advance to an experienced mortgage lender to guide you down the best path.  Discussing your options prior to an immediate loan need can save you a ton of time and headache.