Home buyers are required to provide proof of employment as well as income to qualify for any conventional or government-backed (FHA) mortgage today. This is accomplished in two different ways, with paycheck stubs and W2s and the lender sending a Verification of Employment, or VOE form, to the individual’s employer. The lender completes the VOE and returns it to the requesting party. The VOE will show how much the employee makes each month along with a running year-to-date total. It also shows the date of initial employment.
Copies of W2 forms provide both a two-year history of employment as well as annual totals. Verifying income for an employee is relatively easy compared to someone considered self-employed. With FHA loans, there are specific guidelines for verifying income both for someone employed and self-employed. There are also provisions made for those who are employed but also contract their work out to others in addition to their regular income.
FHA guidelines for someone considered an independent contractor will require copies of the most recent year’s 1099s. Someone who is considered an independent contractor can work with multiple businesses or just one. But most often an independent contractor has working agreements with several companies. The 1099s are sent to the contractor by the company the contractor works with.
1099 income must not only have a history but also be relatively consistent. For example, someone may agree to perform some work for a company on a one-time basis. Someone who does some work just once but never again will need to show other types of self-employed income in order to use that income to qualify. An employee of a company can get a paycheck on the 1st and 15th of the month and agree to perform some external work for a fee. If there is no consistent two-year history of doing extra work outside the employer, it won’t likely be used.
However, if there is a two-year history of both regular employment and working as an independent contractor, the additional 1099 income can be used to help qualify for an FHA loan.
This consistent, two-year history applies to all types of employment. Someone for example who works as a carpenter for a carpentry company for two years but then decides to start out as an independent contractor, guidelines will ask to wait another two years as an independent contractor. The thinking behind this two-year period is not only to show consistent annual income but also show the ability to run a business. Being self-employed adds a layer of stress that regular employees do not have. A traditional employee can get a paycheck direct-deposited to a bank account on time, every time. With an independent contractor, income can come in at various times.
Additional FHA guidelines for 1099 employees include having a minimum credit score. For FHA loans, the minimum credit score for a loan with a 3.5 percent down payment, with a credit score minimum of 600-620 from most lenders. However, an individual lender may also impose more strict credit score limits as long as those limits are applied universally to all applicants. Copies of bank statements, both personal and business, will also be needed. Two years of income tax returns will also be required, supporting the self-employment income.
The income on the bank statements should match up relatively close to reported 1099 income. A year-to-date profit and loss statement is also needed because the contractor is considered self-employed. The P&L should also align with reported income. Most programs only ask for a P&L performed by the applicant, yet some can ask for a P&L completed by a licensed accountant or financial professional.
Your loan officer will go over what documentation you’ll be asked to provide to support your 1099 income but your two-year tax returns, both personal and business, and all copies of 1099s will be the main pieces of information provided to your lender to properly calculate qualifying income. To arrive at qualifying income, the lender will average the last two years of 1099 income together along with a year-to-date profit and loss statement. The income should not only have a history but show consistency from one year to the next. Increasing income from one year to the next is averaged but if there is a year-to-year decrease lenders will want to know the cause of the drop in income before moving much further with the approval process.
1099 employees can expect to provide more paperwork compared to a traditional employee but when properly documented the application and approval process will be relatively similar to W2 employees.
Please contact us today to learn more by calling the number above, or just submit the short request form on this page.