A stack of 1099s is income a lender can use, and plenty of Florida buyers paid that way own homes: nurses working through staffing agencies, insurance adjusters, real estate agents, truck drivers and tutors. The lender's job is to turn those forms into a monthly figure, and that figure isn't the total printed on the 1099s.
Why 1099 pay is treated as self-employment
An employer withholds taxes from a W-2 paycheck. A company that pays you on a 1099 doesn't, because you're an independent contractor running your own one-person business. You report that business on Schedule C of your tax return, the IRS form for a sole proprietorship, and you deduct your business expenses there.
Since your income lives on Schedule C, lenders follow self-employment rules. FHA treats anyone with a 25% or greater ownership interest in a business as self-employed, and a sole proprietor owns all of theirs. The income the lender uses is your net profit, not your gross receipts.
How much 1099 history you need
The standard is two years of self-employment income on your tax returns. Both FHA and Fannie Mae offer a shorter path for someone who did the same work as an employee first:
- FHA counts self-employment of one to two years when you worked at least two years before that in the same or a related line of work.
- Fannie Mae accepts 12 months on your most recent tax return when your earlier job was in the same field or a similar role and paid the same or more.
A nurse who spent four years on a hospital payroll and then went to 1099 staffing work 14 months ago has a full year on her latest return and can usually qualify on it. Someone who left a retail job a year ago to start 1099 insurance adjusting is in a new line of work and generally needs the full two years.
A worked example
Nicole is a registered nurse who has worked 1099 contracts through staffing agencies for three years. Her credit card and car payments total $400 a month.
| Two years ago | Last year | |
|---|---|---|
| Total on her 1099s | $68,000 | $74,000 |
| Schedule C expenses (mileage, licensing, scrubs, phone, liability insurance) | $9,500 | $10,500 |
| Net profit | $58,500 | $63,500 |
FHA takes the lesser of her two-year average and her most recent year:
- Two-year average: $122,000 ÷ 24 = $5,083.33 a month
- Last year alone: $63,500 ÷ 12 = $5,291.67 a month
- FHA uses $5,083.33
At a 5.75% rate, with property tax at 0.95% of the price a year (the high end of the 0.74% to 0.95% range QualRate uses for Florida) and insurance of $283 a month, that supports an FHA price of $301,000. The payment is $2,379.16: $1,724.74 in principal and interest on a $295,548.14 loan (which includes the 1.75% upfront mortgage insurance premium), $238.29 in property tax, $283.00 in insurance and $133.13 in monthly mortgage insurance. That's 46.8% of her income for housing and 54.7% with her debts.
A Conventional lender runs a cash flow worksheet (Fannie Mae Form 1084) that adds back expenses that cost no cash, such as depreciation. If $2,100 of each year's mileage deduction was depreciation on her car, her Conventional income becomes $126,200 ÷ 24 = $5,258.33 a month.
Program by program
- FHA: Lesser of the two-year average and the latest year. If income dropped more than 20% over that period, the loan is underwritten by hand, called manual underwriting, with lower ratio limits.
- Conventional: From a 620 score, with add-backs for depreciation and similar items and a total debt ratio up to 50%.
- VA: Generally two years of self-employment, with residual income, the money left each month after the payment, debts and taxes, deciding the approval.
- USDA: Two years of earnings, and the household income limit counts every adult's income in the home.
Before you file, and before you apply
- Weigh your deductions. Every expense you write off lowers the income a lender can use. If you're buying within a year or two, talk with your tax preparer about the trade-off before you file.
- Keep current on taxes. Contractors pay their own estimated taxes. If you fell behind, an IRS installment agreement keeps the loan possible, and the IRS payment plan page covers it.
- Have a year-to-date profit and loss statement ready. FHA wants one when more than three months have passed since the end of your last tax year.
- Add a W-2 earner or a co-signer. A spouse's paycheck or a parent's income on FHA or Conventional evens out an uneven 1099 year.
- Use FHA 100% financing. A down payment assistance second covers the 3.5% down, from a 580 score, so your cash stays available for the slow months.
The QualRate calculator takes your averaged net profit and shows your price on FHA, Conventional, VA and USDA. Gather your last two returns and call AAA Capital Funding at 888-601-8344, and we'll work out the exact monthly figure a lender will use before you shop.