1099 Loans
What is 1099 Loans? (and How Does it Work?)
1099 Loans are a specialized type of Non-Qualified Mortgage (Non-QM) created for borrowers who earn income reported on IRS Form 1099. Instead of relying on traditional income verification, these loans use alternative documentation methods to provide flexibility for individuals whose tax deductions significantly lower their taxable income. This approach helps self-employed professionals and independent contractors qualify for financing even when they fall short of the strict income requirements of conventional Qualified Mortgages (QM).
How it Works (The Core Mechanism):
1099 loans rely on assessing a borrower’s Ability-to-Repay (ATR) based on the gross income reported on their 1099 forms, after applying a standardized or verified expense ratio, rather than their complex tax returns.
- Documentation: The borrower provides their 1099 form(s) and proof of continued year-to-date earnings.
- Expense Calculation: We applies a predetermined expense factor (often 10% or 15%) to the gross receipts, or uses an expense ratio provided by a third-party professional (CPA/EA/Tax Preparer).
- Qualifying Income: The resulting net income is averaged over 12 or 24 months to determine the borrower’s stable monthly qualifying income.
Get More In-Dept Details About 1099 Loans
Articles that give you more information about this loan and explain how mortgages work.
Who is Generally Eligible to Borrow under 1099 Loans?
1099 loans are specifically tailored for self-employed individuals who do not receive a standard W-2 paycheck.
Eligible Borrower Profiles:
- Self-Employed Individuals: Entrepreneurs, freelancers, contractors, gig workers, and small business owners.
- Independent Contractors: Borrowers who receive compensation either in the form of commission or on an independent contractor basis and receive Form 1099 at year-end.
- Primary Income Source: The borrower’s primary source of qualifying income (greater than 50%) must be calculated based on the 1099(s) provided.
Key Eligibility Guidelines and Requirements:
| Requirement | Details (Sources) |
| Employment History | Generally requires a 2-year history in the same line of work. A minimum of 1 year of receiving 1099 income is typically required. |
| Credit Score | Requires a minimum credit score of 700 for some programs. The required score can vary by program tier, sometimes as low as 660 for Alt Doc loans. |
| Down Payment | Lenders commonly require a minimum down payment of 20%. |
| Property Types | Available for Primary residences, second homes, and investment properties. However, some programs, like our Horizon Non-QM Alt Doc, do not permit 1099 income for Investment Properties. |
| Ineligible Activities (Our Edge Program) | Rideshare drivers (Uber, Lyft, etc.) are explicitly ineligible for the 1099 program. |
| LLC Payouts | The 1099 statement must be payable to the individual borrower(s) for the Nations Direct Mortgage (NDM) program; 1099s payable to a business entity are not eligible under NDM. Conversely, Our programs allow a 1099 paid to the borrower’s LLC if a CPA letter verifies 100% ownership and a 15% expense factor is applied. |
What are the Primary 1099 Loan Income Documentation Methods?
The goal of 1099 documentation is to verify income consistency and the stability of the borrower’s self-employment.
Required Documents:
- 1099 Forms: The borrower must provide the most recent one or two years of 1099(s).
- YTD Earnings: Documentation of year-to-date (YTD) income must be provided within 90 or 120 days of the note date via a check stub/checks showing YTD totals, a WVOE, payroll register, or bank statements showing receipt of income.
- IRS Transcripts: Wage & Income Transcripts for the year(s) of qualifying 1099 income are generally required.
- Expense Verification: A CPA, EA, or licensed tax preparer must complete a profit and loss statement or expense ratio letter.
Income Calculation Methods:
Qualifying income is calculated by taking the gross receipts minus an applicable expense ratio.
- Uniform Fixed Expense Factor (Most Common): A 10% expense factor (meaning 90% of gross 1099 earnings are used) is frequently applied, especially when the borrower has no office space, employees, or cost of goods.
- LLC Expense Factor: If the 1099 is paid to the borrower’s LLC, a higher 15% expense factor may be required.
- P&L Statement: A third-party prepared P&L statement can be used. If two years of 1099s are provided and the gross receipts are declining, a P&L covering the most recent calendar year must be provided and utilized.
Income Averaging:
- Stable/Increasing Income: A 24-month average of net income should be utilized.
- Declining Income: A 12-month average of the most recent net income shall be utilized.
What are the 1099 Loans Eligibility Requirements After Bankruptcy or Foreclosure?
Since 1099 loans fall under the Non-QM umbrella, they are designed to offer flexibility for borrowers with past credit issues, potentially requiring no waiting period after a housing event for qualified individuals.
The specific seasoning period (the time elapsed since the event completion date or discharge/dismissal date) varies significantly depending on the lender’s specific Non-QM program tier:
| Sharp Program Tier | Seasoning Requirement for Housing Event* |
| Sharp Standard | 24 months clean derogatory housing event history required. |
| Sharp Premium | 36 months clean derogatory housing event history required. |
| Sharp Expanded | 4+ years seasoning required. |
| Horizon Non-QM Elite Expanded | 4 years seasoning required. |
*Note: A housing event typically includes Foreclosure, Short Sale, Deed in Lieu, Default Modification, Notice of Default, or 120+ Delinquent. Bankruptcy (Ch 7, 11, 13) seasoning is based on the discharge or dismissal date.
What are the Pros and Cons of 1099 Loan Mortgages?
1099 mortgages share the general benefits and drawbacks associated with Non-QM products:
| Pros (Flexibility and Accessibility) | Cons (Cost and Documentation) |
| Flexible Income Verification: They are ideal for self-employed individuals and gig workers whose taxable income is significantly reduced by tax deductions and write-offs. | Higher Costs: Non-QM loans typically come with higher interest rates compared to conventional mortgages. |
| Easier Qualification: They make qualifying simpler for those with unconventional income streams, such as contract or freelance work. | Larger Down Payment: A minimum of 20% down payment is often required for 1099 loans. |
| Credit Flexibility: They have less restrictive credit requirements, allowing borrowers with recent credit issues (like bankruptcy or foreclosure) to qualify sooner. | Detailed Documentation: While they eliminate tax returns, 1099 mortgages require other detailed records, such as P&L statements prepared by a third party, and extensive YTD earnings proof and bank statements to verify cash flow. |
| Property Options: They are available for a variety of property types, including primary residences, second homes, and investment properties. | Maximum DTI: Debt-to-Income ratios are typically limited to 50% or 55%. |
What is different about 1099 Loans from Shining Star Funding?
Shining Star Funding is a Division of CMG Home Loans.
We offer Alt Docs (Alternative Documentation) loans, which are defined as loans without requiring W2s, paystubs, or taxes.
Therefore, 1099 loans offered through this division would adhere to our Non-QM guidelines found throughout the guides, which specify the documentation, expense ratios (e.g., 10% factor), and seasoning requirements detailed above.
How do I apply for 1099 Loans?
Initial Assessment and Lender Selection
The first step is determining if a 1099 loan is the right fit and finding a specialized lender, as these are Non-QM products. Shining Star Funding can help you with 1099 Loans.
- Determine Your Needs: A 1099 loan is primarily designed for self-employed individuals, independent contractors, or gig workers who receive compensation via IRS Form 1099. This loan is ideal if you have sufficient income but cannot qualify for a traditional Qualified Mortgage (QM) because your tax write-offs significantly lower your taxable income.
- Find a Specialized Lender (Shining Star Funding) or Broker: Not all lenders offer Non-QM products. You should look for a lender or mortgage broker who specializes in this area. Shining Star Funding offers these programs.
- Initiate Contact: Contact the us or broker to discuss your situation. We provide an “Apply Now” option or suggest submitting a loan scenario through a quick quote form to connect with a Non-QM Loan specialist.
Pre-Approval and Underwriting
Once you select a lender, you will submit an application for pre-approval. Since Non-QM loans must still satisfy the Ability-to-Repay (ATR) requirements and often utilize manual underwriting, the documentation process is crucial.
Key Documentation Required for a 1099 Loan
The following documents must be gathered to verify the consistency and source of your 1099 income:
| Document Category | Specific Requirements |
| 1099 Forms | Most recent one or two years of 1099(s). |
| YTD Earnings Proof | Documentation of year-to-date (YTD) income must be provided within 90 or 120 calendar days of the Note Date. This proves continued receipt of income. Acceptable documents include: Check stubs/checks showing YTD totals, 3 months of bank statements, or YTD earnings statements from the 1099 business. |
| Employment Verification | Two years employment history in the same line of work must be verified, with a minimum of one year of receiving 1099 income. This may be verified via a written VOE, CPA’s letter, or other relevant documentation. |
| Expense Certification | A CPA, EA, or licensed tax preparer completed profit and loss statement or expense ratio letter is often required, or we may apply a Uniform Expense Factor. |
| IRS Transcripts | Wage & Income Transcripts for the year(s) of qualifying 1099 income are generally required. |
| Tax Returns (Supplemental) | Although the 1099 program is designed to avoid using tax returns, two years of tax returns (including Schedule C and E) may be typically required by some lenders or requested at the lender’s discretion to fully assess the borrower’s income. |
Key Qualification Parameters
To ensure your application moves smoothly through underwriting, verify these general requirements:
- Credit Score: A minimum credit score of 700 is typically required for some programs. Some programs may allow scores lower than 700, but often with resulting restrictions on Loan-to-Value (LTV).
- Down Payment/LTV: Expect to provide a minimum down payment of 20%. Loans using the 1099 Only documentation may face a 5% reduction in maximum LTV for some programs.
- Income Calculation: We calculate your qualifying income by taking the gross receipts from your 1099s minus an applicable expense ratio.
- A 10% expense factor (meaning 90% of gross receipts is used) is commonly applied, particularly if the borrower does not have significant job-related expenses.
- The resulting net income is averaged over 12 or 24 months, depending on whether income is stable or declining.
- Business Structure: For the NDM 1099 Only program, the 1099 statement must be payable to the individual borrower(s), and 1099s payable to a business entity are ineligible. However, some of our programs allow a 1099 paid to the borrower’s LLC if a CPA letter verifies 100% ownership and a 15% expense factor is applied.
- Declining Income: If your gross receipts are declining, a 12-month average of net income shall be utilized.
Completing the Loan and Funding
- Formal Application and Underwriting: Once the property is secured, you will formally apply for the loan. We will thoroughly review all documentation to verify your Ability to Repay.
- Closing: If approved, the loan is funded, and you close on the home.
Special Considerations- Rideshare Drivers: Note that rideshare drivers (Uber, Lyft, etc.) are ineligible for the 1099 program under the our Edge Series guidelines.
- Multiple 1099s: Borrowers paid by multiple 1099s are generally considered Self-Employed and may need to qualify using 12- or 24-month bank statements instead of the streamlined 1099 program, unless the multiple 1099s are customary in their industry (e.g., medical contractor).
- Supplemental Income: If you are relying on 1099 income but need to supplement it, other sources like Social Security, Pension, Alimony, Child Support, and Second Job income may be utilized, provided you do not provide tax returns beyond W-2s/1099s, and the 1099 income remains your primary source (>50% of qualifying income).
FAQ's
To apply for a 1099 Loan, you should first consult with a Non-QM Loan specialist at an institution us, who offer this specialized product. You must gather the necessary alternative documentation, including the most recent one or two years of 1099 forms, along with verified Wage & Income Transcripts. The application process also requires proof of a two-year employment history and documentation of current year-to-date earnings to verify the income stream’s continuance.
A key benefit of the 1099 Loan is its flexible income documentation, which allows self-employed individuals to qualify based on their gross earnings, overcoming income reductions caused by tax deductions and write-offs. However, major drawbacks include higher interest rates due to the non-traditional verification and increased perceived risk, along with the requirement for larger down payments. Many lenders typically require a minimum 20% down payment for a 1099 Loan.
Eligibility for a 1099 Loan after a derogatory credit event like bankruptcy or foreclosure is determined by the specific Non-QM program tier and requires a dedicated seasoning period. Depending on the lender’s risk classification, this seasoning can range from a 24-month clean history (Sharp Standard) up to 48 months (four years) for expanded program access, measured from the event’s discharge or completion date. Non-QM loans offer this flexibility as they are not subject to the mandatory waiting periods required by government or conventional loans.
Primary documentation for a 1099 Loan includes the most recent one or two years of 1099 forms and required IRS Wage & Income Transcripts. Lenders calculate qualifying income by applying a fixed expense factor, commonly 10%, to the gross receipts unless the borrower is responsible for significant job-related expenses. Additionally, proof of Year-to-Date (YTD) earnings must be provided via check stubs or bank statements within 90 to 120 days of the note date to confirm the continued stability of income.
Eligibility for a 1099 Loan is generally limited to self-employed individuals, freelancers, contractors, and business owners whose primary income source (>50% of qualifying income) is derived from 1099 activity. Borrowers must typically verify a two-year employment history in the same line of work, with at least one year of receiving 1099 income. They must also maintain good credit, as many programs require a minimum 700 FICO score.
The 1099 Loan is a specific type of Non-Qualified Mortgage (Non-QM) designed for self-employed individuals and independent contractors who receive income documented on IRS Form 1099. This product uses alternative documentation to assess the borrower’s Ability-to-Repay (ATR) based on their gross receipts, effectively sidestepping the challenge of low taxable income caused by extensive tax write-offs. Lenders rely on the 1099 forms and apply an expense ratio to determine the qualifying monthly income.
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