Eligible Business Income For 1099 Loans
Eligible Business Income for 1099 Loans
The fundamental requirement is that eligible business income for 1099 loans must be derived from an active, stable business activity.
The 1099 Only product is intended for borrowers whose income is compensation received either in the form of commission or on an independent contractor basis and who receive IRS Form 1099 at year-end. Since these programs rely on alternative verification, strict guidelines govern the source and structure of the income used to determine the borrower’s Ability-to-Repay (ATR).
General Eligible Income Sources
- Independent Contractor/Commission Income: The program is designed for borrowers earning 100% commission, independent contractors, or laborers from one or several companies. Borrowers who are freelancers, contractors, or business owners who pay themselves via 1099 are the target demographic.
- Primary Income Source: To be eligible for the 1099 Only product, the borrower’s primary income source must be the 1099 calculation, meaning more than 50% of the qualifying income must be derived from the 1099(s) less the applicable expense ratio.
- Income Calculation Basis: The qualifying income is generally determined by calculating the gross 1099 earnings and applying a fixed expense ratio (commonly 10%, meaning 90% of gross earnings are used). This fixed ratio is typically reserved for service businesses with no office space, employees, or cost of goods sold.
- Verification of Stability: The income must be considered stable and expected to continue for a minimum of three years.
Special Scenarios and Eligibility Exceptions
Specific business structures or combinations of income types are permitted only when additional documentation and expense factors are applied:
| Scenario | Eligibility Requirements |
| 1099 Paid to an LLC | Acceptable under our Advantage/Connect if the borrower has 100% ownership of the entity. This must be verified by a CPA letter, and a mandatory 15% expense factor (85% net margin) must be applied to the gross earnings. Note: Other lenders explicitly state that 1099 statements payable to a business entity are not eligible and must be payable to the individual borrower. |
| Multiple 1099s | Borrowers paid by multiple 1099s are generally considered Self-Employed and must qualify using 12- or 24-month bank statements. Exception: Multiple 1099s may be permitted if the borrower is in an industry where this is a common occurrence (e.g., entertainment or medical contractor). |
| Combination W-2 and 1099 | A borrower receiving both W-2 income and independent contractor income via 1099 may include the W-2 income if a CPA or licensed tax professional letter is provided verifying the W-2 income is not the result of employment income (i.e., it is part of their self-employment earnings). |
| W-2 to 1099 Transition | A borrower who recently converted from W-2 to 1099 may be eligible without two full years of 1099s if they remain with the same employer for at least two years or are in the same industry with a similar role (e.g., medical doctor), and provide a contract that addresses job-related expenses. |
Ineligible Business and Ineligible Income Sources
We strictly exclude income sources deemed unstable, non-compliant, or too high-risk for 1099 documentation:
- Related Parties: The 1099 income may not come from a source owned by any of the borrowers on the loan file, nor from a family-owned business. Employment by family members or related individuals is generally considered high-risk and is ineligible income under some programs.
- Rideshare/Gig Drivers: Borrowers working as rideshare drivers (such as Uber, Lyft, and the like) are explicitly ineligible for the 1099 program documentation type.
- Illegal Activities: Any income sources that are illegal under local, state, and/or federal law are not eligible.
- Marijuana Income: Income derived from Medical Marijuana dispensaries, or any business or activity related to recreational marijuana use, growing, selling, or supplying of marijuana, is ineligible income, even if legally permitted under state or local law.
- Non-Profits: Businesses that function as a non-profit enterprise are ineligible business sources.
- Passive/Investment Income (General Alt Doc Rule): Borrowers who only receive income from passive or portfolio sources (e.g., managing own rental properties, distributions from a limited partnership, day trading, property flippers, etc.) are generally ineligible for Alt Doc programs designed for active business revenue, such as Bank Statement loans. Although the 1099 product targets active work, this principle implies that passive 1099 income would also be ineligible.
- Income from Sanctioned Countries: Income from countries sanctioned by OFAC is ineligible income.
FAQ's
Yes, under some programs (like our Advantage/Connect), a 1099 paid to the borrower’s LLC is acceptable, provided a CPA letter verifies the borrower has 100% ownership of the entity.
Borrowers who only receive income from passive or portfolio sources, such as managing own rental properties, distributions from a limited partnership, day trading, or property flippers, are typically ineligible for the Alternative Documentation programs built around active business revenue.
The borrower must generally have a verified two-year history of earning 1099 income in the same line of work.
The 1099 income may not come from a source owned by any of the borrowers on the loan file nor from a family-owned business. Additionally, nonprofit entities are ineligible.
Yes, W-2 income may be included in the calculation if a CPA or licensed tax preparer letter is provided verifying the W-2 income is not the result of employment income but is part of their independent contractor earnings.
No, rideshare drivers like Uber, Lyft, and the like are ineligible for the 1099 program documentation type.
Generally, a borrower paid by multiple 1099s is considered Self Employed and must qualify using 12- or 24-month bank statements instead. An exception may be made if the borrower is in an industry where receiving multiple 1099s is a common occurrence (e.g., entertainment or medical contractor).
No, some guidelines, such as Nations Direct Mortgage’s NonQM product, explicitly state that 1099 statements payable to a business entity owned by the borrower(s) are not eligible; the statement must be payable to the individual borrower.
The 1099 income source must constitute the borrower’s primary income source, meaning it must make up more than 50% of the qualifying income after the applicable expense ratio is deducted.
The 1099 Only product is designed for borrowers who receive compensation either in the form of commission or on an independent contractor basis.
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