How to get lending as a 1099

28 Replies

Hello I am just starting out in investing. I have been saving money and improving my credit score. The only thing is I am a 1099 with my line of work and I write everything off to lower my tax payments, so my income  is “too low.” Though I could absolutely afford to make mortgage payments, how can I get approved for lending after so many tax write offs?

Tax returns are just a profit and loss statement (with a few tax loophole expenses that lenders can "add back" to your reported net income), nothing more and nothing less. Three possibilities:

  1. You genuinely can't afford to make the payments, even though you think you can. We learned from 2007 that borrowers will get in over their heads if allowed to. I talk to folks all the time who think that earning $5k/mo means they can "afford" a $4k/mo mortgage...
  2. You can totally afford to make the payments, but for the fact that maybe you're being a little "creative" when reporting your income to Uncle Sam. It turns out that Uncle Sam and Aunt Fannie Mae are married and talk to each other. All self employed loans in 2019 are in fact stated income loans, the only thing that's different from 2007 is that your "statement" is your tax returns. When you state your income to Uncle Sam, that's the same tax paperwork used by Aunt Fannie Mae. 
  3. Lender isn't 'counting' the rental income correctly. This is a pretty common error. Rental real estate is the only form of self employment where Fannie will use projected rents and projected expenses, without requiring that it first appear on tax returns, but not all lenders honor this and many error more conservatively. 

There are also "non-qm" loans where no DTI is calculated and it's entirely predicated on the rental income of the property. These have very high rates and fees, but still less than hard money. Call it half way in between the two. I've done the math several times, 3 or 5 years of interest at the higher rate will generally cost you more than you saved in taxes by being "creative," if that is the case.

Thanks for the very helpful advice @Chris Mason . I'm in a similar situation where my main income is 1099 and the two properties I have rented just started their leases early July so that income won't help for another year's time. Good to know some more possibilities!

Originally posted by @Denis Dineen :

Thanks for the very helpful advice @Chris Mason . I'm in a similar situation where my main income is 1099 and the two properties I have rented just started their leases early July so that income won't help for another year's time. Good to know some more possibilities!

 Traditional long-term rental income, unlike all other forms of self employment, can be "counted" before it appears on tax returns, provided it makes sense. That rent can indeed be counted assuming a landlord friendly lender.

@Chris Mason oh ok I did not know that. In my short time searching for potential loans for my next investment I have not had many lenders who have regarded my new rent income. I've continuously heard it will take a year so that's refreshing to hear the possibility is there.

Originally posted by @Denis Dineen :

@Chris Mason oh ok I did not know that. In my short time searching for potential loans for my next investment I have not had many lenders who have regarded my new rent income. I've continuously heard it will take a year so that's refreshing to hear the possibility is there.

 Keep looking around. 

@Jaz McDonald ...@Chris Mason threw up some great points, as he always does.  Thanks Chris.  Outside of Chris' information, I'd agree with Stephanie.  You need to find a portfolio or stated income lender, but also be aware of more aggressive terms because of the supposed risk the lender is taking on.  

@Denis Dineen  ...or you could find a portfolio lender who doesn't even consider your other income at all, whether personal or investment/business - they only care about what's in front of them

@Mike Chern - 'non-qm' is just industry jargon for loans that are falling out of a certain credit box.  'QM' = qualified mortgage, which is just basically the standard credit box that the CFPB came up with back in 2014. These loans have certain features that are dictated by CFPB standards.  If outside that box, then it's considered non-qm.  What are you looking for?

Originally posted by @Jaz McDonald :

@Jared Rine , @Chris Mason, @Stephanie P. So as a self-employed first time home buyer, who is trying to get the perks of buying a first home (FHA loan, low rates, and low down payment), basically I need to claim all my income with minimal write-offs?

 I'm self employed too, was 1099 Sole Prop now S-Corp. Oh, look, a revenue check comes in. Do I deposit it? Or do I hide it? Do I walk into some rando bank my CPA doesn't know about and open an account and stash it there? I have that same temptation. The answer is that you do the right thing - you deposit that revenue check and tell the IRS/CPA about it and pay taxes on it.

Originally posted by @Jaz McDonald :

@Jared Rine , @Chris Mason , @Stephanie P. So as a self-employed first time home buyer, who is trying to get the perks of buying a first home (FHA loan, low rates, and low down payment), basically I need to claim all my income with minimal write-offs?

My apologies.  I thought you were looking for a NON owner occupied property.

There are owner occupied loans out there for self employed borrowers that do not require tax returns and you MAY qualify for one of those. They generally require bank statements (either 12 or 24 months) and a pretty decent down payment (generally 20%). You won't qualify for FHA and get today's low rates nor will you put down 3.5%. @chris mason is right. Claim all of your income, pay your taxes and see where the numbers shake out. While you're in this situation, find a 4 unit property to live in and let the tenants help you qualify.

Stephanie

 

@Jaz McDonald ..apologies, as I also misunderstood and assumed you were looking for NO/O properties too.  As @Stephanie P. mentioned, there are programs for self employed, but they are all portfolio.  You're not going to find the low down payment options provided with say bank statement or asset depletion, or 1099 only programs.  

@Denis Dineen ..I could probably help you. PM if possible and let me know what you've got going on. Thank you.

@Jaz McDonald

My solution is as follows..

I've owned an LLC as a retail store for now 3 years. The retail store is not my full time income, (more of a passion project that is growing to become a residual source of income) I have employees that run it throughout the week as I work full time in construction on 1099. I simply created two separate business accounts for my LLC, I've been having my 1099 employer write my checks directly to my LLC. I then formed an S-Corp. With a few months of having my self on the books I can show my W-2 to the lender. Once approved for the property I can Then lower my salary to about 30% of actual 1099 income. This avoids self employment tax... (15%). The majority of my major expenses are ran directly through the business as business expenses. The 30% I'm living off of is the only money I have to pay taxes on. You have to be creative with your structure to make it work. Also depends on the lender.

Originally posted by @Nicholas Dennis :

@Jaz McDonald

My solution is as follows..

I've owned an LLC as a retail store for now 3 years. The retail store is not my full time income, (more of a passion project that is growing to become a residual source of income) I have employees that run it throughout the week as I work full time in construction on 1099. I simply created two separate business accounts for my LLC, I've been having my 1099 employer write my checks directly to my LLC. I then formed an S-Corp. With a few months of having my self on the books I can show my W-2 to the lender. Once approved for the property I can Then lower my salary to about 30% of actual 1099 income. This avoids self employment tax... (15%). The majority of my major expenses are ran directly through the business as business expenses. The 30% I'm living off of is the only money I have to pay taxes on. You have to be creative with your structure to make it work. Also depends on the lender.

The thing is, the 1099 employer is you.  Passing yourself off as a W2 employee when you're really not is mortgage fraud.  If you're the owner of the S-Corp and you don't disclose it, that's mortgage fraud.  Either way, you're better off going with a bank statement program or just paying your taxes.

@Stephanie P.

It’s fraudulent to pay yourself as an s-Corp? I’m paying my taxes when I put myself on payroll. All I’m doing is putting myself on payroll from my business... giving my self a salary. That salary I will use for the lender.

So your saying don’t leverage business right offs? Vehicle expenses.. phone bill.. gas etc? I’m confused on how any of that is mortgage fraud..

@Nicholas Dennis

No, I'm not saying paying yourself from your S-Corp is fraud. 

  • I am saying not representing yourself to qualify for a loan backed by Fannie Mae or Freddie Mac as the principle of the S-Corp that pays your salary when you are the principle of the S-Corp is fraud.
  • By definition, you are self employed if you get paid 1099.  You are not a W2 employee.  Representing yourself to an underwriter as a W2 employee of a company you own and not disclosing that you own the company is mortgage fraud.  It's that simple.  They find out when they review your personal tax returns and the part about owning an S-Corp show up, but you haven't provided K1's or 1120's.
  • Decreasing the percentage of ownership to a fraudulent number like 30% to avoid self employment tax when you're 100% owner is tax evasion.

Not sure how that's a mystery unless I'm missing something.  Maybe you have partners who own the other portion of the business or some other stuff not disclosed on the thread or maybe I'm not getting the whole picture and haven't had enough coffee, but when I read it and the reread it, I keep getting the same answer and none of that stuff depends on the lender; none of them like to be lied to or manipulated.

There are very creative ways to structure loans.  I get it.  My portion of the industry was born of the need for people who don't qualify or don't fit into the Fannie Mae box.  As @Chris Mason often says, Uncle Sam and Aunt Fannie talk to each other.  You can't play in their sandbox and not follow their rules.

Stephanie



@Stephanie P.

Let me simplify this. All I am doing is qualifying for a loan as an S corporation the fact that I’m an S corporation and I pay myself a salary is better to a loan officer than trying to show them a 1099.

The 1099 employer is paying my S corporation as a subcontractor. When I go to the loan officer the underwriter will look at my S corporation and see that I’m being paid a salary versus just showing them 1099 bank statements.

@Stephanie P.

As far as decreasing my percentage of the ownership I’m not sure as to where that comes to play. I never said I was going to decrease the percentage of my ownership all I was saying is I am going to increase my salary before I get the loan once I get the loan I may decrease my salary and up my business expenses.

Example

My business revenue is $100,000

Before loan my expenses and reinvestments total $50,000

I pay my self a salary of $50,000 taxed as an s-Corp.

I’m approved and move into the home.

Suddenly my business expenses go up to $70,000

But my revenue stays the same. I then pay myself a salary of $30,000....

@Nicholas Dennis

The fact that you pay yourself a salary may be better to a really stupid loan officer, but it's not better and won't help you qualify any differently to a decent underwriter or even a bad underwriter.

Make sure I understand this:

Your construction employer pays your S Corp.  That's fine.  I got it. To spell it out, let's say the guy who gets the jobs (the GC) needs a framer/drywall hanger (the sub).  That sub gets paid $30 per hour to do what he does and he's responsible for his own taxes, worker's comp etc...(BTW , the GC is making out here).  When the sub goes to get a loan, the underwriter is going to ask for full tax returns because IN THE EYES OF FANNIE MAE AND FREDDIE MAC (or LP and DU where your loan will be uploaded to get the AU findings), the sub is self employed, regardless whether he pays himself a salary or not; he owns more than 25% of the S Corp.

Again, if you own more than 25% of the S Corp or if you're sole member of an LLC and that S Corp or LLC pays you a salary and you just disclose the W2 for income without disclosing your ownership in the company or the LLC, that's fraud.

@Stephanie P.

Instead of looking at the 1099 income the underwriter is looking at a business with 3 years that pays me a consistent pay check..

That’s not better to a loan office to see a business with history then a 1099 misc?

I AM DISCLOSING THAT I AM 100% OWNER