Independent Contractor or Freelancer Paid Strictly via Form 1099
Necessity and Program Overview
Non-QM loans are uniquely positioned to serve the growing freelance economy. Freelancer Paid Strictly via Form 1099 individuals—including Independent Contractor paid via 1099 such as commission earners and gig workers—often struggle to obtain traditional mortgages because they lack W-2s and utilize significant tax deductions that minimize their taxable income.
- Product Definition: The 1099 Only product is designed for borrowers who receive compensation either in the form of commission or on an independent contractor basis and receive IRS Form 1099 at year-end.
- Income Focus: This program helps self-employed workers by focusing on income from the 1099 forms instead of tax returns.
- Primary Income Source: To be eligible, the borrower’s income derived from the calculated 1099 earnings (less the applicable expense ratio) must constitute their primary income source (typically greater than 50% of qualifying income).
Qualification and History Requirements
Qualification under the 1099 Only program is tied to demonstrating income stability and is subject to strict eligibility checks:
- Employment History: Borrowers generally must have a verified 2-year history of earning 1099 income and employment in the same line of work. Qualification typically requires providing 1 or 2 years of 1099s.
- Recent Transition from W-2: A borrower who recently converted from a W-2 to a 1099 role may be eligible if they satisfy specific documentation requirements and were either in the same role with the same employer or in the same industry for at least one year with a different company.
- Entity Status: If the 1099 is paid to the borrower’s LLC, it is acceptable, provided a CPA letter verifies the LLC is 100% owned by the borrower and is active. However, in some programs, 1099 statements payable to a business entity owned by the borrower are not eligible. Additionally, in the Horizon Alt Doc program, borrowers paid via 1099 but who are not business owners of the issuing entity are eligible.
- Credit Score and Down Payment: A minimum 700 credit score is often required to be eligible. Borrowers must be prepared for higher down payments, with a minimum of 20% down often required for 1099 mortgage loans.
Income Calculation Methodology
Unlike Bank Statement loans, which average deposits, 1099 Only programs calculate income directly from the gross earnings reported on the 1099 form, factoring in standard business expenses:
- Fixed Expense Ratio: Qualifying income is calculated by applying a uniform 10% expense factor (resulting in 90% net margin) to all eligible gross receipts.
- Expense Reasonableness: The expense ratio should be reasonable for the profession. This specific 1099 documentation type is generally intended only for borrowers with no office space, employees, cost of goods, etc..
- Ineligible Professions: Certain professions, such as rideshare drivers (Uber, Lyft, and the like), are ineligible for the 1099 program and must use other documentation methods.
- LLC Expense Factor: If the 1099 is paid to the borrower’s LLC, a 15% expense factor must be applied.
Required Documentation and Verification
We require specific documentation to confirm the receipt and stability of the income:
- IRS Forms: The most recent one or two years of 1099 tax forms are required.
- Tax Transcripts: Wage and Income Transcripts for the year(s) of qualifying income are required.
- Year-to-Date (YTD) Income: Documentation of the receipt of year-to-date income is required within a specific period (e.g., 90 to 120 calendar days of the note date) to verify continued earnings. This can be provided via check stubs, checks showing YTD totals, or bank statements showing receipt of YTD income.
- Supplemental Income: Borrowers relying on 1099s may supplement their income with other sources (Social Security, Pension, Alimony, etc.) but must use the full documentation guidelines for those supplemental sources and cannot provide tax returns other than W-2s/1099s.
- P&L Statement: While the program is designed to avoid full tax returns, some lenders may request a Profit and Loss (P&L) statement to assess income and expenses. A P&L prepared by a CPA/EA/licensed tax preparer may also be provided to support the expense ratio method.
FAQ's
A borrower who recently converted from a W-2 to a 1099 role may be considered if they were with the same employer for at least two years or were in the same industry with a similar role (e.g., medical doctor), and provide a contract detailing the new terms of employment.
Yes. Borrowers should have no office space, employees, or cost of goods, etc., for this doc type. Specifically, rideshare drivers like Uber, Lyft, and the like are ineligible for the 1099 program.
Wage & Income Transcripts for the year(s) of qualifying income are required from the IRS to verify the 1099s provided.
Documentation of Year-to-Date (YTD) earnings is required, such as check stubs, checks showing receipt of YTD income, or bank statements showing the receipt of YTD income. This must be documented within a specific period, often 90 to 120 calendar days of the note date.
A 1099 paid to the borrower’s LLC is acceptable if a CPA letter verifies the LLC is 100% owned by the borrower and is active. However, in this case, a 15% expense factor must be applied instead of the standard 10%.
Yes, in scenarios where the borrower receives multiple 1099s, they must be in an industry where this is a common occurrence, such as entertainment or medical contracting.
The required credit score varies by lender, but is typically a minimum 700 credit score to be eligible for a 1099 mortgage loan.
Qualifying income is determined by applying a uniform 10% expense factor to the eligible gross receipts. This means that 90% of the gross 1099 earnings are typically used for qualification.
Borrowers must typically have a verified two-year employment history in the same line of work and must have received 1099 income for at least one year.
A 1099 income loan is a Non-QM solution specifically for self-employed workers or independent contractors who receive compensation via IRS Form 1099 at year end. These loans help those who struggle to get a regular mortgage because they lack W-2s and may have non-traditional income.
527 Sycamore Valley Rd W, Danville, CA 94526
Toll Free Call : (866) 280-0020
For informational purposes only. No guarantee of accuracy is expressed or implied. Programs shown may not include all options or pricing structures. Rates, terms, programs and underwriting policies subject to change without notice. This is not an offer to extend credit or a commitment to lend. All loans subject to underwriting approval. Some products may not be available in all states and restrictions may apply. Equal Housing Opportunity.
Interactive calculators are self-help tools. Results received from this calculator are designed for comparative and illustrative purposes only, and accuracy is not guaranteed. Shining Star Funding is not responsible for any errors, omissions, or misrepresentations. This calculator does not have the ability to pre-qualify you for any loan program or promotion. Qualification for loan programs may require additional information such as credit scores and cash reserves which is not gathered in this calculator. Information such as interest rates and pricing are subject to change at any time and without notice. Additional fees such as HOA dues are not included in calculations. All information such as interest rates, taxes, insurance, PMI payments, etc. are estimates and should be used for comparison only. Shining Star Funding does not guarantee any of the information obtained by this calculator.
Privacy Policy | Accessibility Statement | Term of Use | NMLS Consumer Access
CMG Mortgage, Inc. dba Shining Star Funding, NMLS ID# 1820 (www.nmlsconsumeraccess.org, www.cmghomeloans.com), Equal Housing Opportunity. Licensed by the Department of Financial Protection and Innovation (DFPI) under the California Residential Mortgage Lending Act No. 4150025. To verify our complete list of state licenses, please visit www.cmgfi.com/corporate/licensing