1099 Only Loan Program
What is a 1099 Only Loan Program?
It’s a powerful financial tool geared toward independent contractors and the self-employed. It’s an increasingly popular mortgage option that’s tailor-made for today’s diverse economy. It could be your best path to home ownership.
1099 Only Loans: The Basics
Self-employed borrowers have long faced a significant obstacle to mortgage financing: many lenders want to see traditional income documentation. For most salaried employees and similar wage earners, this system works just fine. They give a lender their W-2s, and the lender uses these tax forms to verify income and approve conventional mortgage loans.
It’s different for the self-employed; they usually file 1099 tax forms. The self-employed often have deductions and write-offs that may skew the view of their income streams. Thus, self-employed homebuyers benefit greatly from loan programs such as 1099 only, in which mortgage professionals use 1099 forms to verify the ability to repay the loan. If the loan applicant can prove they can afford mortgage payments, they likely qualify for a 1099 only loan program.
Borrowers can use 1099 only loans to refinance existing loans or to purchase properties. Owner-occupied homes, second homes, and investment properties are eligible. Borrowers can use a 1099 only loan to finance a range of residences, from single-family homes and condos to multi-unit properties and more. If you can do it with a conventional loan, you can probably do it with a 1099 only.
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How do I qualify for a 1099 only loan program?
The criteria used to qualify for a 1099 only loan is similar to that for a conventional loan. In both cases, mortgage professionals like to see income, or financial resources, that indicate an ability to repay the loan. And two things: a minimum credit score and a solid debt-to-income (DTI) ratio.
Borrowers with FICO scores of at least 600 can often qualify for a 1099 only loan. Don’t know your FICO score? There are several ways to get it for free. Most major credit card issuers will give their cardholders access to their credit scores, and many banks offer FICO scores to account holders through their online banking portals. Several popular apps offer free credit scores. You can also get free credit reports from the three major credit bureaus: Equifax, Experian, and TransUnion.
What about DTI? There isn’t a make-or-break DTI number. However, 43% or lower is a good debt-to-income ratio for those seeking mortgage approval. Don’t know your DTI? You can estimate yours with an online DTI calculator.
Beyond FICO and DTI, the mortgage professional might wish to see that the potential borrower has been self-employed for one or two years. To verify this self-employment, a mortgage professional may ask for further documentation, such as a business license, a letter from a Certified Public Accountant (CPA), or bank statements. Qualification varies by case, and finding out exactly what you need for loan approval begins with a conversation with a trusted mortgage professional.
What about the down payment?
While it could be the case, it’s uncommon for a non-traditional mortgage loan to come with no money down. How much a borrower needs to put down depends on the loan amount, the borrower’s financial profile, and other factors. With a 1099 only loan, down payments can range from 10% to 20% of the purchase price of the home, but that percentage may go higher.
What are the terms of 1099 only loans?
Truly versatile, a 1099 only loan offers a choice of terms. These include:
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- 5-Year Adjustable Rate. With a 5-year adjustable-rate mortgage (ARM), borrowers often get an introductory interest rate that is lower than current rates for traditional fixed-rate mortgages. After an initial fixed-rate period of up to five years, the mortgage converts to a variable rate for the rest of the loan’s life.
- 7-Year Adjustable Rate. With up to two more years of an initial fixed rate, a 7-year ARM is a good option for borrowers seeking lower payments at the start of the loan. With both 5- and 7-year ARMs, homeowners can sell or refinance before the conversion from fixed rate to adjustable rate.
- 30-Year Fixed Rate. America’s most popular mortgage option, a 30-year fixed-rate mortgage spreads out the loan payments over 30 years. With the same interest rate you locked in at the start of the loan. As long as you don’t sell the home or refinance, the payment stays the same.
- Interest-Only. Designed to keep initial monthly payments low, interest-only mortgages are as they sound: borrowers only make interest payments at the start of the loan, often for the first few years. Repayment structures vary. Interest-only loans are popular with buyers who are looking to fix up houses and sell them for a profit.
Who should consider a 1099 only loan program?
Almost anyone who is not a salaried employee. This includes a wide spectrum of self-employed professionals, contract workers, freelancers, and gig economy workers of all kinds. If you’ve been your own boss for more than a year, chances are a 1099 only loan will work for you.
Pros & Cons of 1099 Loans
The plus side of 1099 only loans includes:
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- Faster processing. Loan approval for a 1099 only mortgage can go faster than approval for other loan types; proof of income for the past two years may be all you need.
- Flexibility. With both fixed- and variable-rate options and varying term lengths, 1099 only loans cater to a wide spectrum of financial situations.
- Accessibility. Creditworthy borrowers who don’t fit the profile for the traditional loan approval process have fewer roadblocks.
A few drawbacks of 1099 only loans can include:
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- Interest rates. Compared to conventional loans, 1099 only loans can come with higher interest rates. This is because mortgage professionals take on more risk; salaried employees usually have more job security than self-employed borrowers.
- Term length. 1099 only loans can come with shorter terms, which may translate to higher monthly payments compared to their conventional counterparts.