If you are a business owner or a self-employed professional, you have very different needs for mortgage lending. The typical documents used in a mortgage application, such as paystubs and tax returns, often don’t apply to your situation, especially if you use a 1099 loan.
Unfortunately, many self-employed people have trouble getting a loan for a home purchase. It’s certainly not impossible, but there are more details, more “hoops to jump through,” so to speak.
A 1099 loan could create a solution. These loans, which use the 1099 form as the foundation for processing the loan, are extremely useful, but you’ll need to collect a variety of documents to complete the application.
Understanding 1099 Loans
A 1099 loan is simply a loan that uses the 1099 form, and not pay stubs, tax returns, W2s, or other typical documents, as its foundation.
The 1099 is an income-reporting form that is used by self-employed individuals to report their annual earnings to the IRS. Every client or customer who hires the self-employed contractor for at least $600 annually needs to fill out a 1099 form. They will then send a copy to the IRS as well as a copy to the contractor.
The person hiring out the contractor is responsible for completing the 1099 form. However, as the contractor it’s wise to double check that these forms are being completed.
There are different types of 1099 forms, but most will use form 1099-NEC, which stands for “Non-Employment Compensation.” This form essentially verifies a person’s role as a non-salaried, independent contractor and not an employee.
Documents You’ll Need for a 1099 Loan
1099 loans are fairly easy to complete, but you’ll need to bring a variety of information to ensure final approval. While you likely won’t need all of them, these are some of the documents you may need for a 1099 loan…
All 1099 Forms
First and foremost, you’ll need to bring all of your 1099 documents from the past two years of business. These forms are crucial, as they tell the lender how much you have earned over the past two years, allowing them to form a fairly accurate picture for your future earnings.
The total 1099 income for the past two years will be added together, then the lender will divide that number by 24. This allows them to create an average monthly income (24 months in two years), which can then be applied to your mortgage application.
Tax Returns (Personal)
While the 1099 forms establish your total earning for the sake of taxes, your tax returns can also be important when creating a mortgage application. There can be a lot of duplicate information, but the tax returns largely verify and strengthen your total application, helping you clearly demonstrate a strong, steady income.
You’ll likely need tax returns from the past two years, although more could be requested under certain situations.
Tax Returns (Business)
While you need personal tax returns for almost all types of mortgages, for a 1099 loan you will likely need your business tax returns as well. Of course, not all contractors will need business tax returns; if you don’t run an LLC or corporation of any type, and you are merely a self-employed, solo contractor, a tax return on your business may not be needed.
These documents will also be needed for the past two years.
Bank Statements
If you are self employed, you may need to bring bank statements to verify your income and cash reserves. In fact, you may be able to secure a loan based entirely on your bank statements. Known as “bank statement loans,” this form on financing is a common option, and may be an alternative is a 1099 loan does not work out.
Bank statements create a clear picture of your overall financial situation. They not only show how much you earn, but they can demonstrate a high amount of savings, which could be useful if your loan requires cash reserves.
A Copy of Your Business License
The lender has a clear and obvious interest in ensuring you have a proper business license. Of course, not all businesses need to be licensed, but a lender still wants to know that you are fully qualified and can legally operate your company.
Basically, these documents show lenders that you are legally capable of continuing your business, which is clearly important to lenders.
Profit and Loss Statement
Lenders like to have as much information as possible, and few documents provide as much information on the quality of your business as the profit and loss statement. These documents, often called the “P&L,” demonstrate your overall revenues, expenses, and profit, and they are usually organized year by year.
These documents are often laid out in a table format, which makes referencing specific items easy. When going through your income information, the lender will likely want this data to make sure your company is financially strong.
Balance Sheet
These sheets are similar to a P&L, but they instead show how much you own compared to how much you owe. Essentially, it is intended to show your assets against your liabilities. This document is not always requested, but it can be an important document for lending professionals.
CPA Letter Verifying Business
Yes, you may have to bring a document from your CPA that demonstrates the simple fact that your company is still in business. It’s not always requested, but it may be a required document for certain 1099 loans.
Although more (or fewer) could be requested, with these documents, you should have everything you need to secure a top-quality 1099 loan!
Get the 1099 Loan You Need
As a self-employed professional, securing a loan can be complicated. But with a 1099 loan from our experienced team, you’ll be able to purchase a wonderful home in the area of your choice.
Contact our staff today to learn more about 1099 loans, required documents, and the application process. No matter what your employment status, we’ll do our part to help you purchase a dream home!
