Employment History for 1099 Loans
Employment History for 1099 Loans
1099 income documentation is intended for borrowers who receive compensation as commission or on an independent contractor basis and receive IRS Form 1099 at year end. Because these loans use alternative income verification, we place a strong emphasis on establishing the stability and continuity of the borrower’s work history.
Minimum Employment History Requirements
The core requirement for 1099 loans is typically two years of demonstrated employment stability in the same line of work.
A. Standard Duration
- Two-Year History: Borrowers must generally have a two-year employment history in the same line of work.
- 1099 Receipt: The borrower must have at least one year of receiving 1099 income. Some lenders, such as NASB, may accept one year of 1099 income but generally prefer two years of stable 1099 income to qualify.
- Self-Employed Definition: For underwriting purposes, income from self-employment is considered stable and effective if the borrower has been self-employed for two or more years.
- Less Than Two Years: Less than two years of self-employment history can be considered if the borrower provides documentation showing a minimum of two years employment history in the same line of work or a related profession. However, income history of less than one year may not be considered effective income.
B. Stability and Continuity
- Continuance: All sources of income, including 1099 income, must be stable with a reasonable expectation that at least the same level of income will continue for a minimum of three years.
- Income Trend: The expectation is that income year over year is stable or shows a gradual increase. If the income trend is declining and has not stabilized, the income may not be used. Declining income trends should be closely reviewed, and a written explanation should be provided by the employer or the borrower.
Documentation and Verification Requirements
We use a combination of formal IRS transcripts and current activity verification to confirm the borrower’s 1099 history.
- IRS Transcripts: We require Wage & Income Transcripts for the year(s) of qualifying income. Current executed transcripts will validate the borrower’s current ITIN status if applicable for 1099 loans.
- Verbal Verification of Employment (VVOE): A Verbal Verification of Employment (VVOE) must be obtained for each borrower using employment income to qualify. For self-employed borrowers, the verification must be completed within 30 calendar days prior to the note date.
- Current Earnings (YTD): Documentation of Year-to-Date (YTD) earnings is required (often within 90 or 120 days of the note date) to support the ongoing receipt of income reflected on the 1099s. Acceptable evidence includes payroll registers, WVOE, bank statements showing receipt of income, or checks/check stubs with YTD totals.
- Business Verification: For self-employed borrowers, the existence of the business must be verified through a third party (such as a CPA, regulatory agency, or licensing bureau) within 30 calendar days of closing.
Special Scenarios for 1099 Borrowers
A. Recent Transition from W-2 to 1099
A borrower who recently converted from a W-2 employee to a 1099 contractor may be eligible even without two full years of 1099 history, provided specific conditions are met:
- The borrower must be with the same employer for at least two years or in the same industry with a similar role (e.g., medical doctor).
- The borrower must provide a contract.
- The employer/contract must either indicate the borrower will not be responsible for any job-related expenses or a 10% expense factor will be applied to the income calculation.
- For the income calculation, the underwriter should use the borrower’s last two years’ W-2 income (less any 2106 expenses claimed) as the basis, which the new Profit and Loss (P&L) statement should support.
B. Multiple 1099s and Entity Ownership
The source of the 1099 income is heavily scrutinized:
- Multiple 1099s: A borrower paid by multiple 1099s is typically classified as a general self-employed borrower and is required to qualify using 12- or 24-month bank statements instead of the 1099 Only program. However, exceptions may be made for borrowers in industries where multiple 1099s are common (e.g., entertainment or medical contracting).
- 1099 to LLC: If the 1099 is paid to the borrower’s LLC, it may be acceptable if a CPA letter verifies 100% ownership by the borrower, and a 15% expense factor is applied. However, some Non-QM guidelines explicitly state that 1099 statements payable to a business entity owned by the borrower are not eligible.
- Source Restrictions: The 1099 income used to qualify may not come from a source owned by any of the borrowers on the loan file, nor from a family-owned business.
- Ineligible Activities: Rideshare drivers (such as Uber and Lyft) are explicitly ineligible for the 1099 program documentation type.
FAQ's
The VVOE for self-employment income must be obtained within 30 calendar days prior to the note date.
The existence of the borrower’s business must be verified through a third party (like a CPA or licensing bureau) within 30 calendar days prior to the note date.
The lender must comply with the Ability-to-Repay (ATR) rule by verifying the consumer’s current employment status.
The borrower must explain any employment gaps exceeding 90 days in writing. Gaps greater than six months require an explanation and documentation of a minimum two-year history prior to the gap.
They must be with the same employer for at least 2 years or in the same industry with a similar role (e.g., medical doctor), and provide a contract.
Less than two years can be considered with documentation of a minimum of two years employment history in the same line of work or a related profession.
The income source must be stable and reasonably expected to continue for a minimum of three years.
Income history of less than one year may not be considered as effective income.
The borrower must have received at least one year of 1099 income.
Borrowers must generally have a two-year employment history in the same line of work.
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