What is the best way to qualify for a mortgage with 1099 income? How can you make it look like W2 income to banks?
There is absolutely no rule or guideline prohibiting an independent contractor from obtaining a traditional residential mortgage. Usually what happens is that someone is being dishonest, about something.
- Have them hire you full time, as an employee and not a self-employed independent contractor. If someone is telling you that they are your employer but refusing to issue the W2 that any regular employee is entitled to, they may be committing tax fraud.
- If you truly are a self-employed independent contractor, then declare your income honestly when you do your taxes. If you want some of Aunt Fannie Mae's cheap money, then you need to be right with your Uncle Sam first. It turns out that Aunt Fannie and Uncle Sam talk to each other.
- If neither of the above works, then it's quite possible that consumer protection laws are getting in your way, which means the "no" is for your own good -- it's to prevent your own foreclosure.
@David Gritz I'm not a lender. Wouldn't be able to assist more than I already have, which is to say you need to shop around for a no-doc loan. They aren't as popular as they were 13-15 years ago, but they are out there. I moved out of Philly just before my seventh birthday, so I'm short on area contacts to recommend :-)
What is the best way to qualify for a mortgage with 1099 income? How can you make it look like W2 income to banks?
There is absolutely no rule or guideline prohibiting an independent contractor from obtaining a traditional residential mortgage. Usually what happens is that someone is being dishonest, about something.
- Have them hire you full time, as an employee and not a self-employed independent contractor. If someone is telling you that they are your employer but refusing to issue the W2 that any regular employee is entitled to, they may be committing tax fraud.
- If you truly are a self-employed independent contractor, then declare your income honestly when you do your taxes. If you want some of Aunt Fannie Mae's cheap money, then you need to be right with your Uncle Sam first. It turns out that Aunt Fannie and Uncle Sam talk to each other.
- If neither of the above works, then it's quite possible that consumer protection laws are getting in your way, which means the "no" is for your own good -- it's to prevent your own foreclosure.
The real question is what are you trying to do? Are you buying to fix and flip? Most hard money guys don't want to see your taxes. Are you trying to buy and hold? Many of those guys don't care about your taxes either (but they do ask to see your tax returns to make sure you filed which doesn't make sense truthfully, but that's what they say). If you're trying for traditional financing though, you will need full tax returns for your business if you're more than a 25% owner (and if you're an independent contractor, you qualify for self employed).
Your question is phrased in a way that makes you look a bit shady though (not judging, just commenting). Bankers are pretty sophisticated these days with the advent of the computer and all and there's just no way to make income "look" like something else. You're better off finding the right lender that fits what you are rather than trying to fool the ones that will know in the end. There's a lender for everyone.
David Gritz
Hey. Didn’t see your response. You have to use the @ function or else people won’t see a reply...
Getting around the 1099 thing isn’t about being creative. It’s just the hard part about being self employed or on a contract when it comes to Fannie Mae or FHA rules.
Sure, you could do Subject To, or owner financing. If you’re asking about traditional lending, you won’t be able to get around those guidelines. You could possibly find a lender that would do the loan and keep it on their books, but lenders don’t like doing that so they’ll hit you with higher than average rates.
There has to be a more creative answer than this. What about with non-traditional lenders like private equity, online lenders, or credit unions?
David - what you are suggesting is actually Mortgage Fraud. There are no "creative answers." Either your income is derived from 1099 or it's not. There is absolutely no grey area here.
Stephanie Potter I wouldn’t say most HMLs dont want to see your taxes. They just don’t really care about what’s in them, per se.
They may just want to see how you earn money in addition to bank statements, but I’ve seen tax returns from guys losing well over $100k a year and still getting loans.
Thanks for everyone's thoughts. I am not trying to get around any rules or laws, I am simply trying to create a discussion to help others. I am familiar with alternative capital sources and typically work with friends (private investors) if I need no doc financing.
The main goal in the question was to understand the market. It was my understanding that loans used to exist with no or limited documentation requirements that did not distinguish between if you had W-2 or 1099 income. The logic is that income is income. If you make $100k / year 1099 and do it consistently it should be treated the same as if you have a $100k / year salary. However, it appears from the discussion above that traditional banks do not see it that way.
David Gritz
No doc loans pretty much went away after the bust. Has nothing to do with how banks see things. Purely about guidelines and risk.
Some lenders are starting to offer them again, but it purely comes down to how much risk they are willing to take.
1099 income is traditionally not as stable as W2 income. If a lender sees that the nature of the 1099 income is less risky then they might accept it. Recent guidelines issued in September suggest they no longer have to go by the two year rule, but banks decide how much risk they are willing to take on.