1099-Only Loans

Qualifying for a traditional mortgage can be a challenge for self-employed individuals who earn income reported on IRS Form 1099 rather than W-2 forms. Standard underwriting guidelines often don’t account for the unique income structures of these professionals.

Fortunately, other loan types are available that deal with this unique scenario, including 1099-only loans. These flexible mortgage solutions allow self-employed borrowers to qualify for a home loan without the need for typical tax returns or pay stubs.

In this article, we’ll go over what 1099-only loans are, how they work, and the perks and drawbacks to help you decide if this loan option is right for you.

What is a 1099-Only Loan?

A 1099-only loan is a type of mortgage that’s designed with self-employed individuals and independent contractors in mind, who earn income documented on 1099 forms. Unlike traditional mortgages that require standard loan documentation, such as W-2s and tax returns, 1099-only loans mainly depend on the borrower’s latest 1099s to verify income.

Who Do 1099-Only Loans Work Best For?

These loans are particularly useful for borrowers who earn an irregular or project-based income. Despite earning sufficient income to qualify for a mortgage, their earnings may not show predictability from one month to the next.

In particular, 1099-only loans may be suitable for the following types of borrowers:

• Freelancers
• Gig workers
• Self-employed individuals
• Independent contractors
• Commission-based professionals

If you’re self-employed or an independent contractor who earns a sufficient income to support mortgage payments, but your earnings are documented on a 1099 rather than standard W-2s or tax returns, a 1099-only loan may be most suitable for you.

How Do 1099-Only Loans Work?

Lenders use the information noted on a borrower’s 1099 forms from the past year or two to calculate income. These forms display gross payments, which can provide mortgage lenders with a clearer picture of total income before any deductions were made.

What Other Documents May Be Required?

In addition to 1099 forms, other documents may be requested, depending on the lender. These may include:

• Profit and loss statements
• Bank statements to support the consistency of income
• Verification of continual contracts or streams of income

What Are the Requirements for 1099-Only Loans?

While each lender may have unique guidelines, most 1099-only mortgage requirements are as follows:

Pros of 1099-Only Loans

• Alternative Income Source for Verification: Borrowers may qualify for financing without the need to supply traditional W-2s, tax returns, or pay stubs.
• Flexible Eligibility Requirements: Lenders often have greater flexibility in determining underwriting criteria, allowing for a more individualized process.
• Quick Loan Processing: 1099-only loans can be processed more quickly than traditional mortgages given fewer documentation requirements.

Cons of 1099-Only Loans

• Higher Interest Rates: The lack of traditional income documentation can place lenders at greater risk, which can lead to higher interest rates.
• Bigger Down Payments: Borrowers may need to put down 10% to 20%, compared to 3% to 5% for conventional home loans.
• Limited Availability: Not all lenders are experienced with 1099-only loans, which can reduce options for borrowers.
• Complex Underwriting: The documentation review process may be more complicated and comprehensive than the standard mortgage process.

Considerations for Borrowers

Before applying for a 1099-only loan, be sure to consider the following factors:

• Sacrificing Cost For Convenience: 1099-only loans may provide a solution for income verification for those who aren’t traditionally employed, but they often come at a higher cost than conventional mortgages.
• Shop Around: Not all lenders offer 1099-only loans. Plus, terms may vary widely. Find a seasoned mortgage company that’s experienced with 1099-only loan programs.
• Financial Discipline: Consistent and clean bank statements are crucial. Steer clear of making large, unexplained deposits and withdrawals, and frequent overdrafts.
• Time in Business: If you’re new to the world of self-employment, you may want to wait until you’ve been in business for at least 12 to 24 months. This will provide you with consistent 1099 income to boost your odds of loan approval with better terms.
• Know Your Debts: Understand your current debt situation in-depth, as it will have a direct effect on your debt-to-income ratio and overall borrowing power.
• Prequalification vs. Pre-Approval: Understand the difference between pre-qualification and pre-approval. While getting pre-qualified may provide you with some insight into what you may qualify for, pre-approval involves a more comprehensive review of your financials and gives you more negotiating power with sellers.

How Do 1099-Only Loans Compare to Traditional Mortgages?

While you’ll still need to meet income and credit requirements with both 1099-only and traditional mortgages, there are some key differences between the two:

FAQs About 1099-Only Loans

• Can I use future contracts to qualify for a 1099-only loan?

That depends on the lender. Some may allow future or current contracts to be used as proof of continued income, particularly in areas such as tech or consulting.

• Do I need tax returns to qualify for a 1099-only loan? 

No, tax returns are not necessary, as lenders verify income using 1099 earning statements and bank statements instead.

• Are 1099-only loans suitable for first-time buyers?

Yes, first-time home buyers may qualify for 1099-only loans if they’re able to demonstrate consistent 1099 income and meet the other eligibility criteria.

• Can I use more than one 1099 to qualify? 

Yes, you can use one or multiple 1099s from the past one to two years to verify your income.

• What’s the difference between a 1099-only loan and a bank statement loan?

Both loans are designed for self-employed individuals, but the key difference lies with the documents required to qualify. While bank statement loans rely more on a borrower’s bank statements to verify income consistency, 1099-only loans depend primarily on 1099 forms.

• Will a 1099-only loan have a bigger impact on my credit compared to a traditional mortgage?

No, 1099-only loans behave like other loan types in terms of credit reporting.

• Can in-house underwriting speed up the process for a 1099-only loan?

Yes, in-house underwriting can speed up the process by eliminating delays typical with third-party reviews. Since the lender handles underwriting internally, decisions are made faster, which reduces processing time.

• Does Sammamish Mortgage offer in-house underwriting?

Yes, Sammamish Mortgage offers in-house underwriting, which allows for more control over the process and a speedier outcome.

• Where can I find the best lenders for 1099-only mortgages? 

Check out online client testimonials to find lenders that offer 1099-only loans. Sites like Zillow, Redfin, Bankrate, and Google My Business (GMB) are great online platforms to start with.

Need Financing?

If you’re looking to buy a home as a self-employed individual in the Pacific Northwest region, we can help. At Sammamish Mortgage, we offer various mortgage programs for those without traditional employment documentation in WA, OR, ID, CO, and CA. Visit our website to get an instant rate quote, or call us today to have your mortgage questions answered!