Complete guide to self-employed/1099 loan strategies
Being your own boss comes with plenty of advantages. You may have more control over your schedule, your income, and the work you take on. But when it comes time to buy a home or refinance, being a self-employed borrower can make the mortgage process look a little different. That does not mean getting approved is out of reach.
Whether you are a business owner, freelancer, independent contractor, consultant, or 1099 worker, there are mortgage strategies designed to help New England borrowers with nontraditional income. The key is understanding how lenders look at self-employment income and knowing which mortgage options may fit your financial situation.
Why mortgages can be different for a self-employed borrower
A traditional W-2 employee can usually provide pay stubs and W-2 forms to document income. A self-employed borrower may have a more complicated financial picture.
Your income may vary from month to month. You may receive payments from multiple clients. You may also use legitimate business deductions that reduce the income shown on your tax returns.
This can sometimes create a frustrating situation. You may have strong cash flow and a successful business, but the income used for traditional mortgage qualification may not fully reflect your current financial picture.
Fortunately, self-employed borrowers are not limited to one type of mortgage.
Start by understanding how your income is documented
One of the best strategies for a self-employed borrower is to speak with a mortgage professional early in the homebuying process.
The way your income is documented can affect which loan programs are available to you. Depending on the mortgage program and your individual situation, documentation may include:
- Personal and business tax returns
- 1099 forms
- Bank statements
- Business bank statements
- Profit and loss statements
- Business licenses or other documentation verifying your business
- Documentation showing the history and stability of your income
Getting organized before applying can help make the mortgage process smoother.
It is also important to remember that lenders are generally looking for a clear picture of your ability to repay the loan. Strong documentation can help tell the story of your income, especially when your earnings do not look the same every month.
Traditional mortgage options may still work
Many self-employed borrowers assume they automatically need a specialized mortgage program. That is not always the case.
A self-employed borrower may still qualify for a conventional or government-backed mortgage if their documented income meets the program requirements.
For example, traditional mortgage programs may be a good fit for borrowers who have:
- A stable history of self-employment
- Consistent or increasing income
- Tax returns that show sufficient qualifying income
- Strong credit
- Manageable monthly debt
Mortgage Equity Partners offers a variety of mortgage solutions, and the right option depends on the borrower’s complete financial profile. A local New England loan officer can help determine whether a traditional mortgage or an alternative documentation program makes the most sense.
Consider a Bank Statement Loan
For many self-employed borrowers, tax returns do not always tell the complete story.
Business owners often take advantage of legitimate tax deductions. While those deductions can be beneficial at tax time, they may reduce the income that appears on a tax return for mortgage qualification purposes.
This is where a Bank Statement Loan may be worth exploring.
Bank Statement Loans are great for eligible self-employed borrowers. Rather than relying solely on traditional W-2 forms and tax returns, these programs can use bank statements to help document income. Depending on the program, personal or business bank statements may be reviewed to establish qualifying income.
A Bank Statement Loan may be particularly helpful for:
- Small business owners
- Independent contractors
- Freelancers
- Entrepreneurs
- Realtors
- Consultants
- Gig workers
These programs can have different qualification requirements than conventional mortgages, so it is important to review the details with a knowledgeable loan officer.
1099 Income Loans can help independent contractors
If you are paid as a 1099 worker, you may have a different income profile than a traditional employee.
Freelancers, contractors, consultants, and many gig economy workers may receive 1099 forms instead of W-2s. While 1099 income can absolutely be used to qualify for a mortgage, the documentation process may differ depending on the loan program.
Many lenders offer a 1099 Income Loan option for eligible self-employed borrowers. This Non-QM solution is designed for 1099 workers who may have difficulty qualifying through traditional mortgage guidelines.
This can provide another path to homeownership for borrowers whose income is strong but does not fit neatly into a standard W-2 employment model.
A P&L Only Income Loan may be another option
Some self-employed borrowers have a well-established business but need a different way to document their income.
P&L Only Income loan programs are another choice for eligible borrowers. These programs can allow qualifying self-employed borrowers to use a profit and loss statement prepared by a CPA as part of the income documentation process.
Depending on the program, this type of financing may provide flexibility for primary residences, second homes, or investment properties.
As with any mortgage, program requirements and eligibility apply, so borrowers should work closely with a loan officer to determine whether this strategy is appropriate.
Keep your personal and business finances organized
Organization is one of the simplest ways to make life easier as a self-employed borrower.
Keeping personal and business finances separate can make it easier to document income and track your cash flow. Clear records can also help when you are asked to provide bank statements or additional business documentation during the mortgage process.
Before applying for a mortgage, consider reviewing:
- Your personal and business bank accounts
- Recent tax returns
- 1099 forms
- Your year-to-date profit and loss statement
- Monthly debt obligations
- Your available assets and down payment funds
Self-employed borrowers may be asked to provide documentation such as tax returns, business tax returns, 1099s, bank statements, and other information depending on their circumstances.
The more organized you are at the beginning, the fewer surprises you may encounter later.
Top 7 things to do right now as a self-employed borrower
1. Avoid making major financial changes before closing
Once you begin the mortgage process, consistency matters.
A self-employed borrower should avoid making unnecessary changes to their financial situation before closing whenever possible. That can include taking on significant new debt, making unusually large purchases, moving money without documentation, or making major changes to the structure of the business.
This does not mean you cannot run your business normally. It simply means that communication is important.
If something significant changes, let your loan officer know. It is usually better to explain a change early than to have an underwriter discover it later and request additional documentation.
2. Focus on your overall financial profile
Income is important, but it is not the only factor in mortgage qualification.
As a self-employed borrower, you should also pay attention to the other parts of your financial profile.
3. Maintain strong credit
Your credit history can affect your mortgage options and terms. Paying bills on time, managing existing debt, and avoiding unnecessary new credit applications can help strengthen your overall profile.
4. Manage your monthly debt
Lenders look at your monthly obligations when determining how much mortgage payment you may be able to afford. Paying down certain debts may improve your financial flexibility, depending on your individual situation.
5. Save for your down payment and closing costs
The amount you put down can affect your mortgage options. Some borrowers may benefit from a larger down payment, while others may qualify for programs with lower down payment requirements.
6. Keep adequate reserves when possible
Having money available after closing can help strengthen your financial position and provide additional peace of mind as a homeowner.
7. Get pre-approved before you start shopping
One of the best mortgage strategies for a self-employed borrower is to start the conversation early. Do not wait until you have found the perfect house to determine whether your income qualifies.
A pre-approval can help you understand your potential buying power and identify the documentation needed for your specific situation. It can also give you time to address questions about income, credit, assets, or debt before you are under pressure to meet a contract deadline.
It is important to work with a loan professional to understand the documentation required for your particular financial situation and mortgage option.
For self-employed and 1099 borrowers, this early planning can be especially valuable.
The right mortgage strategy starts with the right conversation
There is no single mortgage strategy that works for every self-employed borrower.
A business owner with two years of strong tax returns may be an excellent fit for a conventional mortgage. A freelancer with significant business deductions may benefit from exploring a Bank Statement Loan. A 1099 contractor may have another financing path available through a 1099 Income Loan. A borrower with an established business may find that a P&L Only Income program provides the documentation flexibility they need.
That is why working with a New England lender that understands self-employed income can make a meaningful difference.
Mortgage Equity Partners offers a range of mortgage options for borrowers with traditional and nontraditional income, including Non-QM solutions designed for eligible self-employed borrowers. Bank Statement, 1099 Income, and P&L Only programs can provide additional options when traditional mortgage guidelines are not the right fit.
Final thoughts
Being self-employed should not stop you from pursuing homeownership. The mortgage process may require additional documentation and a little more preparation, but there are strategies available for self-employed borrowers and 1099 workers. The first step is understanding how your income is documented and exploring the mortgage programs that fit your financial situation.
Whether you are a freelancer, independent contractor, entrepreneur, or small business owner, Mortgage Equity Partners can help you explore your mortgage options and develop a strategy based on your individual needs.
Speak with one of our qualified loan officer to learn which mortgage options may be available for your situation. If you are ready to take the next step, start the pre-approval process today.
