For some, the idea of being their own boss is a very alluring idea. You'll get to take charge of your career, shape your journey, and discover a freedom that a traditional 9-5 can't offer you. 

But going from a W-2 employee to self-employed doesn't just affect your taxes—it also impacts the way you are able to access and qualify for mortgage financing.

It's not talked about a lot because, well, people don't know much about it until they have to cross that bridge. But today, it is imperative to understand how various employment statuses affect your financial choices.

We're here to clarify a few common misconceptions and break down exactly what this transition means for you.

TLDR Key Takeaways

• Entrepreneurs and business owners have more difficulty getting approved for a mortgage than W2 employees.
• When you take advantage of tax write-offs, you sacrifice opportunities when it comes to seeking out financing. 
• Self-employed individuals have different requirements when it comes to obtaining a mortgage.

How Transitioning from W2 to 1099 Income Affects The Mortgage Process

The first thing you need to understand is that 98% of all banks are well-equipped and eager to provide mortgage loans to W2 salaried employees because most underwriting guidelines were explicitly made for this group of people. 

Lenders need to evaluate a potential borrower's ability to repay the loan, and W2s are an easy way to prove consistent income since they provide a thoroughly documented paper trail.

While they'll still be required to meet other requirements to qualify for a mortgage, obtaining financing for these types of individuals is a breeze compared to self-employed individuals.

That being said, our legislation and tax codes have changed over the years, giving entrepreneurs and self-employed individuals a major advantage over W2 employees—tax credits and write-offs.

Unlike W2 employees, who have a predictable amount of taxes removed from their income, self-employed income is a little more complicated to calculate because there are so many options available to reduce your taxable income.

This leaves entrepreneurs in a catch-22 of sorts. They can either take advantage of all the tax write-offs or get the best rates when they want to secure financing, but they can't have both.

This results in business owners having to meet specific requirements and prepare a few extra documents when applying for a mortgage loan.

No matter which option you choose, lenders and programs are available to help self-employed individuals secure financing—even those who don't want to use tax returns or owe money to the IRS.

You just need to check with your lender or speak with a mortgage specialist.

W2 vs. 1099 Mortgage Requirements

While the specific requirements may vary from lender to lender, typically, underwriting guidelines dictate that potential borrowers meet the following base criteria:

Special Considerations for Self-Employed Borrowers

Using the chart above, you can see some big differences between the requirements for each type of borrower. 

The most important one is that self-employed individuals have the option to use bank statements to qualify for a mortgage. This is huge, considering that your tax returns most likely don't accurately reflect the actual income of your business.

To secure financing with your bank statements, lenders will typically do a very simple strategic cash analysis based on the cash flow that goes into your business bank account and couple it with a standard expense ratio. 

Depending on how much cash comes into the business account every month, you can get anywhere from 50-85% of what you earn (gross, not net) to use as proof of income to qualify for your loan. 

You'll also need your accountant to write a letter stating your ownership percentage of that business and how long you've been self-employed. 

For those of you that are newly self-employed, you'll have slightly more requirements you'll have to meet, but it's still possible for you to get a loan.

How to Maximize Your Borrowing Power as a 1099 Individual

To maximize your borrowing power when applying for a mortgage, self-employed individuals should take these steps:

1. Increase Your Credit Score: Your credit score is a direct indicator of your ability to manage your finances, so take every opportunity to get your score as high as possible.
2. Put together a Strong Financial Profile: To reassure lenders of your ability to repay the loan, gather a range of documents that clearly demonstrate your reliable and consistent income. 
3. Save Extra Cash Reserves: Having extra cash stashed away for emergencies makes you a more attractive borrower to lenders because it showcases your financial responsibility and lessens the risk of defaulting on your loan.
4. Maintain Current Expense Documents: If your expenses are lower than the standard ratio (50%), then lenders can use your certified amount to calculate your loan amount. 

Explore Your 1099 Mortgage Options With Modern Day Lending

When the time is right to start your journey into 1099 mortgage options, let Modern Day Lending be your guide.

With more than two decades of experience in the mortgage industry, our team understands how challenging it can be for entrepreneurs to secure a loan with competitive rates.

This is why we work hard to provide individualized solutions to your specific needs. Here's what you'll need to get the pre-approval process started:

• 12-24 months' worth of business or personal bank statements 
• CPA letter stating your percentage of ownership, length of self-employment, and your business's standing
• Completed business questionnaire form
• Two months' of personal asset statements
• Driver's license

Ready to get started? Contact one of our mortgage specialists and turn your dreams of home ownership into reality.

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