Self-Employment & Contractor Income

Everything you will need for your mortgage, using self-employment income

What is Self-Employment Income?

Any individual who has a 25% or greater ownership interest in a business is considered to be self-employed. The following are various types of self-employment:

  • Sole Proprietorship (100% owned, net profit is reported on Schedule C of your personal tax returns)
  • LLC, Corporation or Partnership (taxes can be filed on separate returns and you might receive K-1s)
  • 1099 or contract employee (you receive a 1099 from your employer or client every year and report the income on Schedule C of your personal tax returns)
  • Regardless of the setup of the company, if you have 25% or more interest in a business (per your US tax returns) then you are considered self-employed and the business itself, in addition to your income, will need to be evaluated during the underwriting process. This analysis of the business is required even if you are paid a salary by your business. Similarly, if you are a 1099 contract worker, you are also considered self-employed and the "business" that will be evaluated is just your income and expenses for that role. Even though you may work for a company as a contractor, you are considered self-employed.

    What are the Credit Requirements?

    The most important factors that will be considered if you receive self-employed or contractor income are:

    • length of time in which you’ve received this type of income
    • length of time in which you’ve received income from the current business/contract
    • the recent stability of your revenue and income received as compared to your business expenses. 

    Conventional mortgage programs require at least 12-24 months of self-employment history in order to use this income for mortgage qualification purposes. This means if you switched from W-2 employment to running your own business in the last calendar year, you are going to need to explore Non-Agency alternatives to close on a mortgage. 

    Contractor 1099 employment is treated very similarly to self-employment. The biggest difference is that you are not required to have been receiving contractor income from the same or existing contracts from the last two years. You will instead be required to show an active stream of 1099 income for the last two years as well as current contract income that you are receiving or expecting to receive in the year you apply for your mortgage. 

    How is this calculated?
    • All income calculations for self employment are based on your most recent tax returns filed with the IRS.
    • The underwriter will calculate qualifying income from Schedule C by taking the sum of Net Profit, any Non-Recurring Loss, Depletion, Depreciation, Business use of home, and Amortization and averaging that over 2 years to get a monthly income figure.
    • Reach out to your Mortgage Advisor if you are unsure how much income you will qualify with.
    What do we need?
    • General Requirements:
      • Most recent two years of personal tax returns.
      • Most recent two years of business tax returns (if applicable).
      • Most recent two years of K-1s or 1099s (if applicable).
      • Most recent two years of W-2s and paystubs (if you pay yourself a salary).
    • If you have been self-employed in the same business for 5 or more years:
      • As long as you have had flat or increasing income over the past two years and are not using business funds to pay for your down payment and closing costs you will only need to produce your most recent two years of personal tax returns (1040’s), and will not need to provide business tax returns.
    • If you have been self-employed at the same business for less than 2 years:
      • Consulting with your Mortgage Advisor at the outset of the process is important since your self employment history can affect your eligibility for certain products.
    Where can I find them?

    If you have your full tax returns easily accessible, please sign them and upload them to your Closing Tracker. If you do not have them easily accessible, check out this IRS site where you can find information on how to access your tax returns. Transcripts cannot be used in place of full tax returns.

    Why do we need this?

    For any Conventional mortgages (Fannie Mae and Freddie Mac), Lenders are to confirm a number of factors related to all income and employment. Some of these requirements are more difficult to verify and project for Self-Employed and Contractor Income:

    • Stability of your income - two years of documentation is considered to be sufficient to demonstrate that you will receive future earnings.
    • Location and nature of your business.
    • Demand for the product or service offered by your business.
    • Financial strength of your business.
    • Ability for your business to continue generating and distributing sufficient income to enable you to make the payments on the requested mortgage. 

    The lender must prepare a written evaluation of its analysis of your personal income, as a  self-employed borrower, including the business income or loss, reported on your individual income tax returns. The purpose of this written analysis is to determine the amount of stable and continuous income that will be available to you.

    Common Issues

    Proving stable self-employment can be difficult, so please make sure to read through this section carefully. If any of the following statements apply to you or your co-borrower, please let your closing team know and include all pertinent information. 

    • You have expenses that offset income for tax purposes. Negative income or offset income due to high expenses is a great way to save on taxes, but it will prevent you from having qualified income when getting a mortgage.
    • The status and filing of your business have changed in the last year, i.e. your LLC became a Corporation in the past year.
    • You created a new business out of the previous self-employed business, but the two businesses cannot be tied together via tax/audit trail.
    • You recently switched from any different income to self-employed income in the past year.
    • You saw steep declines in your income during the most recent or current year due to highly successful previous years. Please note that this may disqualify income or requires additional documentation and explanation.

    → Continue to the next article in this series, Other Acceptable Income Sources

    Did this answer your question? Thanks for the feedback There was a problem submitting your feedback. Please try again later.