This article is about 1099 And Self Employed Borrowers Mortgage Guidelines
There are strict mortgage lending guidelines on 1099 and Self Employed Borrowers, unlike W-2 income wage earners.
- Borrowers who are self-employed borrowers require two years of tax returns in order to qualify for mortgages
- Self-employed borrowers who just opened a business less than for two years cannot qualify for a mortgage until they have two years longevity as 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 self-employed borrowers who show declining income, the adjusted gross income is NOT averaged for the two years.
Here is a case scenario:
- If a self-employed borrower 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
Here is a case scenario:
- If the gross adjusted income is significant
- such as the 2014 income is $20,000
- and the 2013 gross adjusted income is $100,000
- then the mortgage underwriter can question the income altogether
- this is due to the massive declining of income
- borrowers may not be able to qualify
Mortgage underwriters will reject any income from self-employed borrowers on cases where the decline in income is significant.
How Do Underwriters Calculate Income For 1099 And Self Employed Borrowers
If a self-employed borrower has similar incomes on the two years of tax returns, underwriters will average the two years of income. 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
- This holds true if the borrower can show it was a one-time huge loss
Underwriters need to believe the borrower will not be a recurring loss year after year.
1099 Wage Earners Versus W-2 Wage Earners
1099 wage earners who need to qualify for a mortgage loan borrowers need 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
Borrowers with gaps in employment can qualify for a mortgage without being employed with the same employer for the past two years. There are certain rules and mortgage lending guidelines they need to meet in order to qualify for a mortgage loan.
- Borrowers unemployed for six or more months, they need at least six months on their new job to qualify for a mortgage loan
Borrowers who have 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 luxuries of 1099 and self-employed borrowers is that they can write off many business expenses where it reduces their annual income. Deductions allow tax filers to pay less in income taxes. Unreimbursed business expenses reduce the amount of qualified income that can be used when qualifying for a mortgage.
- Unfortunately, this hurts them when qualifying for a mortgage loan
- This is because many times 1099 and self-employed borrowers have negative income
- 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
- Adding a non-occupant co-borrower can solve borrowers with zero income
- Only the non-occupant co-borrowers income is used in calculating income
The loss of the main borrower is not used to offset the non-occupant co-borrowers income.
About The Author Of 1099 And Self Employed Borrowers
Alex Carlucci is the author of 1099 And Self Employed Borrowers and a contributing writer for Gustan Cho Associates Mortgage News. Alexander Thomas Carlucci is a veteran mortgage professional with over 25 years of experience as a full time licensed mortgage loan originator. Alex Carlucci is an expert on government and conforming loans and is one of the top loan officers with Gustan Cho Associates Mortgage Group. Over 75% of Alex’s borrowers are folks who could not qualify at other mortgage companies due to their overlays on government and conventional mortgages. Alexander Thomas Carlucci is also an expert on non-QM loans and bank statement mortgage loans for self employed borrowers.
June 30, 2020 - 3 min read