Mortgages for Independent Contractors and 1099 Workers

The life of an independent contractor can be one of freedom and satisfaction.  You are responsible for what you earn.  You’re in charge of your hours.  You don’t report to anyone.  However, it can come with its share of challenges, like qualifying for a mortgage.

Don’t worry though, I’ve got your back.  Hey there, I’m Phil, and I write for A Nightmare on Loan Street Blog.  You know, the one you are reading right now?  I can walk you through what it’s like to qualify for a mortgage if you’re a 1099 employee or independent contractor.

Let’s start with the basics.  First, can you qualify for a loan?  Absolutely!  If not, this would be a very short blog post and just end with “no”.  While the answer is that 1099 employees and independent contractors can qualify for a mortgage, there may be some different steps to get there.  That’s really what I’m going to focus on in this blog post.  The “how” you can qualify.

Step #1 is get your documents in order.  While these may vary from lender to lender, here’s what you can expect to provide:

• Tax returns.  The lender is going to be looking for your 1099 income, and the tax return will be able to show this
• Bank statements.  This is another way to show your income, but it will also give the lender some additional insight into your ability to repay the loan
• Additional 1099 proof of income.  If you don’t earn enough from the companies you work for to get a 1099-MISC, you might need to show checks or other forms of payment in addition to bank statements
• Business financial statements.  You may need an accountant to put these together if you don’t have them available (Quickbooks or accounting software may also be able to do this if you keep your own books)

Additional Documents that may be required:

• Business license.  It kind of depends on your industry, but if you have a business license, it’s good to have this available for the bank
• Immigration papers.  If you are a foreign worker, you’ll need to prove that you have a valid visa 
• Credit card and loan statements.  The bank may want to see your credit health (in addition to checking your credit score)
• A W2 and paystubs.  If you have another job and receive a W2 or paystubs, the lender will want to document this income

You may be thinking “wow Phil, that’s a ton of paperwork” and you’d be correct.  Applying for a mortgage requires a lot of paperwork and documents from the borrower.  Don’t stress though, you got this.  If it makes you feel any better, everyone needs to provide a bunch of documents to apply for a mortgage - whether they are a 1099 employee or W2 employee.

The other part of this equation is how does qualification work after you’ve provided these documents?  Said another way, what is the lender looking for to determine if you’re approved or denied?  Lists are always an easy way to view things, so I’m going to drop this knowledge using another list for you.

• Credit score.  Having a solid credit score is important.  Not sure what your credit score is?  I’d definitely recommend learning this, and then taking steps to improve it if necessary.  Paying down debt and paying bills on time will help
• Average monthly income.  Independent contractors don’t always have steady income.  It can fluctuate.  Since you’re providing things like tax returns and bank statements, the lender can create an average monthly income by taking 2 years worth of income and dividing by 24
• Debt to Income Ratio.  This takes your fixed monthly debts and divides it by your monthly income.  It’s expressed as a percentage, and lenders will want to see this below 50% for sure - but the lower, the better.  The Debt to Income Ratio will help lenders see your ability to repay a loan given all the other monthly debts you have

Just like the documentation, each lender will be different, so this is just a starting point so you know what’s up.  

Now’s a good time to let you know that I’d recommend shopping around.  Big banks that offer conventional loans aren’t the only ones who can lend you money for a house.  One place to start is Truss Financial Group.  The experts there take a common sense approach to lending, and work with you, not just your finances.  If that sounds good, give them a call today.