FHA Loan with 1099 Income
Home buyers who earn 1099 income often find it difficult to qualify for a mortgage. The FHA guidelines for 1099 income are clear in that you are able to qualify if you can meet the criteria and provide the necessary documentation.
Can I Qualify for an FHA Loan with 1099 Income?
If you earn 1099 income as an independent contractor, freelance worker or a salesman, you can qualify for an FHA loan if you can document steady 1099 income for the past two years.
FHA loan for 1099 Income Documentation
If you make more than 25% of your annual income via 1099 income, then you will need to provide the last two years 1099’s and all pages of your last two years tax returns. The net income referenced on your tax returns will be used to qualify for an FHA loan.
Calculating 1099 Income for an FHA Loan
If the documented income on your last two years 1099’s are similar, the lender is instructed to use the two year average as the income on your FHA loan application. That two year average divided by 12 months will be the monthly income used on your mortgage application.
If your 1099 income in the most recent year is significantly less than the prior year (it is declining), then the lender will be required to only use the most recent year with the lower 1099 income as a basis for qualification. They will take that annual total and will divide by 12 to come up with your monthly gross income.
Lenders may also take your tax deductions into consideration and may only use the net income. This is what typically makes it difficult to qualify for an FHA loan with 1099 income.
Verification of Your FHA 1099 Income Status
If you are a 1099 borrower and earn your money from just one company, the lender will likely contact that one company to verify that you are still currently a contractor of theirs and whether they plan to retain you.
If you are earning your 1099 income from multiple sources, lenders may not have the ability to contact all of those companies and will instead rely on a CPA letter verifying the nature of your 1099 income. If you do not use a CPA, then you will have to get a minimum of two reference letters from two of the companies you contract with.
Combination of W2 and 1099 Income
If you have a with W2 and you also make 1099 income, then you can combine the two to qualify for your mortgage. FHA lenders will ask for you to completely document all of it to qualify.
If you were making 1099 income this past year and the year before that you were earning W2 income, then you can still qualify if you are able to document all of that income.
Read our article on qualifying for an FHA loan with a part time job.
What FHA lenders Are Really Looking for
Lenders essentially want to verify that you have had steady income for a minimum of two years. They also would like to feel comfortable that the 1099 income is likely to continue.
Lenders are also looking at your credit history to see whether you have managed your debt well in the past. Bankruptcies and foreclosures in your recent past will make it difficult to qualify.
They are concerned because 1099 borrowers often have employment that is unstable. They may have a freelance contract this month and then nothing next month.
How to Qualify for an FHA Loan with 1099 Income
Preparing yourself to be a very attractive borrower will help you to qualify for an FHA loan with 1099 income. Here are a few things you can do to improve your loan application:
- Improve your credit score – a FICO of over 720 is optimal when applying for an FHA home loan. Read our article on FHA credit requirements.
- Reduce your consumer debt – Pay off your credit cards if possible, do not get into a car loan and just reduce your total debt as much as possible.
- Pay your bills on time – Having late payments or collections may hurt your chances to be approved for your mortgage.
- Document all of your income – make sure there is a paper trail detailing all of your 1099 income. If you make some of the money cash, then you should immediately deposit that cash into your bank accounts. You can withdraw that cash afterwards but the deposits help to record the money as income.
- Cash Reserves – If you can have plenty of cash reserves after closing, it will make for a stronger loan application when in front of the FHA underwriters.
What is a 1099 income employee?
1099 Employee is an Independent Contractor who receives a 1099 form instead of a W-2 to verify yearly income. They also may not receive scheduled pay checks like a salaried borrower will receive. Check out this 1099 income tax calculator.
Can I qualify for an FHA loan with 1099 income if I earn cash?
You can qualify for an FHA loan if your income is in cash. You need to deposit all of that cash into your bank accounts as you are earning it. You can make withdrawals afterwards, but you need to record the income via the deposits. Some professions where this would apply are bartenders, waiters and waitresses, cash businesses, and any other profession where cash is the primary source of income.
Questions to Ask Your Lender – Be prepared to ask the right questions when meeting with your lender or mortgage broker.
FHA Loan Requirements – This article will detail everything you need to know about qualifying for an FHA loan.
FHA Mortgage Insurance – Find out how much FHA mortgage insurance will cost when applying for an FHA loan.