Self Employed or W2??

[Todd David Crouch]

Hello All,

Looking for advice regarding lending. I have spent the past 12 months as an independant contractor and wish to finance a project. At one point I was told I could obtain funding (non-conforming was the term that was used) with 12 months of bank statements.

My question is what would make me more appealing to a lender; should I continue with 1099 work or go to W2?? It would be the same basic line of work so there will be continuance there regardless. Not sure which way to turn.

Thanks,

David

[Bryan Maddex]

Hello @Todd David Crouch!

First, banks do not prefer W2 income over 1099 income at all. They just use those incomes differently. 

For 1099 income, we will look at a 2 average of income using your NET NET income (bottom line income).  Most lenders will add back in depreciation and around 1/2 of your milage expenses. Any other expenses are using up funds that would otherwise be sitting in your checking account to make a mortgage payment with. If you tell the IRS it is an expense, it is no longer income.

W2 income does not use a 2 year average for your base pay!  If you have a 2 year work history, and go get a W2 job tomorrow, we could use your base pay right away (as long as it is "guaranteed hours" or considered "full time".  Bonus, Overtime, and Commission income all typically need a 2 year average either at the same job or in the same line of work. (Usually you cannot use prior employer history until you have been at your new job for 6 to 12 months, depending on the underwriter to show that you are maintaining the same level of bonus/overtime/commission income that you had at your prior employer). You can get a 1 year look back occasionally so you do not always need a 2 year average. 

The "non conforming" lending options are actually called NonQM (non qualified mortgages). This term replaced "subprime" and looks a lot different than subprime loans of the past. You usually can do these loans with NO points, you just need to work with a broker who has access to dozens of lenders as there are plenty of lenders that can provide these type of loans with No Points.  You may need to pay points if you put less than 20% down, but lots of no point options once you get to 20% down as long as you have decent credit scores. 

Once you file your 2nd year of tax returns, you may now be able to qualify for Agency Loans (FHA/Conventional). The higher rates and no point options hopefully are temporary for you until you are able to show a 2 year history of 1099 income, refinance early in 2026 once you have completed your 2025 returns.

There are also "no income loans"!  These need 20%-25% down, require a 680-700+ credit score, and 6 to 9 months of reserves (reserves are payments in the bank).  Rates are usually in the high 8s or low 9s, and you are likely going to pay 3-4 points for these loans. 

Let me know if you have any questions!