Lending Guidelines On 1099 And Self Employed Borrowers

There are strict mortgage lending guidelines on 1099 and Self Employed Borrowers unlike W-2 income wage earners.  Mortgage loan borrowers who are 1099 and self employed borrowers require two years tax returns in order to qualify for a mortgage loan.  If you are a 1099 and self employed borrowers and you just opened a business less than for two years, you cannot qualify for a mortgage loan until you have two years longevity as 1099 and self employed borrowers.  Also, mortgage underwriters have full discretion on how they qualify self employed borrowers with regards to declining income and on how they average the prior two years gross adjusted income.

Declining Income On 1099 And Self Employed Borrowers

For 1099 and self employed borrowers who show declining income, the adjusted gross income is NOT averaged for the two years.  If a 1099 and self employed borrowers has an gross adjusted income of $100,000 in 2013 and $50,000 in 2014, the mortgage underwriter will use the lesser of the two years which is $50,000 and not the $75,000 average of the two years.  This is because of declining income.  If the gross adjusted income is significant such as the 2014 income being $20,000 and the 2013 gross adjusted income being $100,000, then the mortgage loan underwriter can question the income altogether due to the massive declining of income and that mortgage loan borrower may not be able to qualify.  Mortgage underwriters will reject any income from the 1099 and self employed borrowers on cases where the decline in income is significant.

How Do Underwriters Calculate Income For 1099 And Self Employed Borrowers

If 1099 and self employed borrowers have similar incomes on the two years tax returns, underwriters will average the two years of income and the monthly income will be the average of the two years.  Underwriters can discount and not count a one time huge loss on 1099 and self employed borrowers if the borrower can show it was a one time huge loss and will not be a recurring loss year after year.

1099 Wage Earners Versus W-2 Wage Earners

If a mortgage loan borrower is a 1099 wage earner, to qualify for a mortgage loan the mortgage loan borrower needs a two year history as a 1099 wage earner.  If a W-2 wage earner goes to a 1099 wage earner status, then two years of 1099 income is required from the start date of the 1099 wage earner status date.  If a 1099 wage earner goes to a W-2 wage earner status, then 30 days of W-2 income is required to qualify for a mortgage loan.

Gaps In Employment

If a mortgage loan borrower has gaps in employment, there are certain rules and mortgage lending guidelines they need to meet in order to qualify for a mortgage loan.  If the mortgage loan borrower has been unemployed for six or more months, they need at least six month on their new job to qualify for a mortgage loan.  If the mortgage loan borrower has been unemployed for less than six months, then they need 30 days of paycheck stubs from their new employment to qualify for a mortgage loan.

1099 And Self Employed Borrowers With Negative Incomes

One of the luxury of 1099 and self employed borrowers is that they can write off many business expenses where it reduces their annual income and can pay less in income taxes.  Unfortunately, this hurts them when qualifying for a mortgage loan because many times 1099 and self employed borrowers have negative income and many file a loss on their income taxes.  On situations where 1099 and self employed borrowers have negative income and declare losses, the mortgage underwriter will just calculate it as zero income and when you add a non-occupant co-borrower, just the non-occupant co-borrowers income is used in calculating income and the loss of the main borrower is not used to offset the non-occupant co-borrowers income.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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