1099-Income Versus W-2 Income Mortgage Lending Guidelines

1099-Income Versus W-2 Income Mortgage Guidelines

Gustan Cho Associates are mortgage brokers licensed in 48 states

This article will cover 1099-income versus W-2 income mortgage lending guidelines. Regarding traditional government and conventional loans, more scrutiny is placed on 1099-wage earners than on W-2 income earners. 1099-wage earners often benefit from being able to write off substantial unreimbursed business expenses. Substantially unreimbursed business expenses will benefit 1099 wage earners by paying fewer taxes. However, large unreimbursed business expenses will lower adjusted gross income. If borrowers do not qualify for traditional conforming loans as self-employed and 1099-wage earners, they can qualify for non-QM loans.

Mortgage Loan Options For No-Income Verification Loans

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Popular mortgage loans with no income verification include bank statement loans, asset-depletion mortgages, no-doc mortgage loans, 1099-income-only mortgage loans, stated-income mortgages, and other alternative mortgage loan options. In the following sections, we will cover the mortgage guidelines on 1099-income versus W-2 income mortgage lending requirements. We discuss the various different types of mortgage loan options homebuyers have. A strong credit score is important for all mortgage applicants but can be particularly crucial for those with a 1099 income. A higher credit score can help offset concerns about the stability of self-employed income.
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How Do Mortgage Underwriters Calculate Adjusted-Gross Income

Adjusted gross income is what lenders use for qualified income. Many tax deductions and lower adjusted gross income will hurt qualifying for a mortgage. Self-employed borrowers who work as Independent contractors or employer classifies them as 1099 employees will have a more challenging time in qualifying for a mortgage than being a W-2 wage earner if they take a lot of tax deductions.

Mortgage Loans For Self-Employed Borrowers

1099-Income Versus W-2 Income Mortgage Lending GuidelinesSelf-employed borrowers, independent contractor wage earners, and business owners always had a harder time qualifying for a mortgage. Mortgage Guidelines require two years 1099-income and tax returns for self-employed borrowers, and business owners. The two year income average needs to be either the same or increasing. Declining income in the most present year may disqualify 1099 wage earners altogether in qualifying for a mortgage.

Borrowers with W-2 income typically provide pay stubs and W-2 forms as proof of income. Lenders may also consider additional income sources, such as bonuses or overtime if they have a consistent history.

When applying for a mortgage, whether you have a 1099 or W-2 income can affect the guidelines and requirements you must meet. In the following sections of this guide, we will cover a breakdown of the main differences. W-2 income comes from traditional employment where the employer withholds taxes. Lenders prefer W-2 income because it is more stable and easier to verify.

Differences Between 1099 Versus W2 Wage Earners

1099 income is typically earned by independent contractors, freelancers, or self-employed individuals. They receive a 1099-MISC or 1099-NEC form from clients or companies they’ve worked for, showing their earnings for the year. Lenders view 1099 income as less stable than W-2 income due to fluctuations and potential inconsistency in earnings.

How Do Mortgage Underwriters Approve 1099 Wage Earners 

Given these differences, in this section we will discuss some general guidelines for mortgage applicants with 1099 income. Lenders may require additional documentation to verify 1099 income, such as profit and loss statements, tax returns (often two years’ worth), and bank statements to show consistent deposits.

Lenders may require borrowers with 1099 income to have higher reserves (savings) to demonstrate their ability to cover mortgage payments during periods of lower income.

Lenders typically look for a consistent history of 1099 income over the past two years. They may average the income over that period to determine a borrower’s qualifying income. Lenders evaluate a borrower’s debt-to-income (DTI) ratio, which compares monthly debt payments to gross monthly income. With 1099 income, lenders may be more conservative in calculating DTI due to the variable nature of the income.

How  Underwriters Calculate 1099-Income Versus W-2 Income Borrowers

In this section, we will discuss how 1099-income versus W-2 income mortgage guidelines work. If a borrower is showing good 1099-income for the past six months and had a W-2 paying job prior to that the chances are they will not qualify for a mortgage. This is due to the two-year mandatory requirement to provide 1099-income.

How Does 1099-Income Only Mortgages Work

1099 wage earners need two years seasoning as being 1099 wage earners in order to qualify for a mortgage. On the flip side, if you are a W-2 employee and have been a W-2 employee for the past 30 days,  you can qualify for a mortgage. You need to provide the offer letter of employment. You need to  provide 30 days paycheck stubs and verification of employment of your new employer.

Mortgage Guidelines on 1099-Income To W-2 Wager Earner

You could have been a 1099-income wage earner prior to getting a new W-2 job and still qualify for a mortgage. So, if you were a 1099 wage earner but recently got  a new W-2 job, WILL you qualify for a mortgage. You can have a gap of employment of less than six months and there is no waiting period after getting a new job to qualify for a mortgage. If you had a period of unemployment of 6 months or longer, you will need to be on your new job for at least six months to qualify for a mortgage. Any periods of unemployment of six months or shorter, only a 30-day paycheck stub will be required prior to underwriter issuing a clear to close.

One Year 1099-Income Is Required on Conventional Loans

Fannie Mae will always require two years of 1099-income per DU FINDINGS to be eligible for an automated approval via Fannie Mae’s Automated Underwriting System. However, Freddie Mac will accept only one-year 1099 per LP FINDINGS via Freddie Mac’s Automated Underwriting System if the applicant is a strong borrower. By a strong borrower, the mortgage applicant needs to show the following:

  • strong income
  • history of self-employment for many years
  • larger down payment
  • plenty of reserves
  • multiple aged credit tradelines
  • other compensating factors

Freddie Mac One Year Income Tax Mortgage Loans

For example, let’s take a case scenario:

  • Mortgage applicant who is a 1099 employee and has a 740 plus credit score
  • 20% down payment
  • 5 credit tradelines
  • $30,000 plus of reserves
  • This mortgage applicant will most likely get an approve eligible per LP FINDINGS with only one-year 1099-income

One year tax returns required whereas a mortgage applicant with a 620 credit score, 5% down payment, 1 credit tradeline, and no reserves will most likely not get a one-year 1099 and/or tax return approval.

Is It Harder To Get Approved For Mortgage as a 1099-Income Versus W-2 Income?

As mentioned earlier,  it is much tougher to qualify for a mortgage for 1099-income than W-2 income wage earners. The difference between a 1099-iincome versus W-2 income earner is that a 1099-income earner  will be required two years 1099-income history in order to qualify for a mortgage. 1099-income versus W-2 income mortgage applicants will need to also provide proof that their 1099-income will likely continue for the next three years.

Can You Get a Mortgage Going From 1099-Income To W2 Income

Borrowers working as a 1099 wage earner but have changed to W-2 income earner, only 30 days of paycheck stubs will be required plus verification of employment. As long as you did not have more than a six-month gap in employment and have changed jobs from a 1099 wage income earner to a W-2 wage income earner, only 30 days of paycheck stubs will be required

Bank Statement Mortgages For Self-Employed Borrowers

Gustan Cho Associates is a five-star national lender with no overlays on government and conventional loans. Gustan Cho Associates are correspondent lenders on non-QM loans and bank statement loans for self employed borrowers. No tax returns are required. We go by averaging the past 24 months of bank statement deposits. Click here to apply for Bank Statement Mortgage loans

How Does Bank Statement Mortgage Loans Work?

Borrowers for bank statement loans can qualify using either personal or business bank statements. You can only use one bank account. Multiple bank accounts do not work. If using personal bank statement deposits, 100% of deposits can be used. If using business bank statement deposits, 50% of deposits are used. 20% down payment with minimum credit scores of 20% down payment on a home purchase. 15% down payment requires 680 credit scores. 10% down payment requires borrowers to have 720 credit scores. Up to 50% debt-to-income ratios.

No-Income Documentation Mortgage Options

There are dozens of non-QM mortgage loan options for borrowers with no income requirements. Non-QM loans are alternative mortgage loan programs that allow for alternative income options for borrowers who are self-employed, independent contractors, and business owners. Gustan Cho Associates is a dba of NEXA Mortgage LLC.

Some lenders offer specialized mortgage programs tailored to self-employed individuals or those with non-traditional income sources. These programs may have different requirements compared to conventional mortgages.

It’s important to note that mortgage guidelines can vary between lenders, and individual circumstances may also play a significant role in the approval process. Working with a knowledgeable mortgage broker or lender who has experience with 1099 income can help you navigate the process more effectively.

Getting Approved For No-Income Verification Mortgages

Home Buyers who need to qualify for a mortgage with a national mortgage company licensed in multiple states with no overlays on FHA, VA, USDA, or Conventional loans, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at alex@gustancho.com. The team at Gustan Cho Associates are experts in  Non-QM loans. We are experts in helping borrowers qualify for a mortgage one day out of bankruptcy and foreclosure with our non-QM loan program. Get approval for No-Income Verification mortgage

Best Mortgage Lenders For No-Income Verification Mortgages

The team at Gustan Cho Associates offer 12-month bank statement mortgage loan program for self-employed borrowers with no income tax returns required. There are no maximum loan limits on non-QM loans. Private mortgage insurance is not required on Non-QM loans. Qualifying for a 1099-income versus W-2 income wage earner has never been easier with non-QM mortgage loans.  The team at Gustan Cho Associates have dozens of different types of no-documentation mortgage loan options. W2-only income mortgages, 1099-income only mortgage loans, no-ratio mortgage loans, DSCR loans, stated-income home mortgages, asset-depletion loans, and other non-QM mortgage loan options are available for our borrowers.

Getting Approved For 1099-Income ONLY Mortgages

The 1099-income only mortgage loan program is a non-QM loan option where 90% of the 1099 income is used as the qualified income for a mortgage. There are no income tax returns required on the 1099-income only mortgage loan program. However, at least a 20% down payment is required. Other mortgage loan options for 1099-income versus W-2 income wage earners includes no-doc loans, DSCR mortgage loans, no-ratio mortgages, asset-depletion, and dozens of other no-income documentation mortgage loans for self-employed and 1099 wage earners.

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  1. Why don’t multiple bank accounts work? As a 1099 earner, I have multiple streams of income and conventional wisdom is to not commingle assets in one bank account. Plus, had I known, I would have funnelled all the money into my personal account so I could use 100% of the income. Is this guideline flexible?

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