How to get lending as a 1099

[Jaz McDonald]

Hello I am just starting out in investing. I have been saving money and improving my credit score. The only thing is I am a 1099 with my line of work and I write everything off to lower my tax payments, so my income  is “too low.” Though I could absolutely afford to make mortgage payments, how can I get approved for lending after so many tax write offs?

[Chris Mason]

Tax returns are just a profit and loss statement (with a few tax loophole expenses that lenders can "add back" to your reported net income), nothing more and nothing less. Three possibilities:

1. You genuinely can't afford to make the payments, even though you think you can. We learned from 2007 that borrowers will get in over their heads if allowed to. I talk to folks all the time who think that earning $5k/mo means they can "afford" a $4k/mo mortgage...
2. You can totally afford to make the payments, but for the fact that maybe you're being a little "creative" when reporting your income to Uncle Sam. It turns out that Uncle Sam and Aunt Fannie Mae are married and talk to each other. All self employed loans in 2019 are in fact stated income loans, the only thing that's different from 2007 is that your "statement" is your tax returns. When you state your income to Uncle Sam, that's the same tax paperwork used by Aunt Fannie Mae. 
3. Lender isn't 'counting' the rental income correctly. This is a pretty common error. Rental real estate is the only form of self employment where Fannie will use projected rents and projected expenses, without requiring that it first appear on tax returns, but not all lenders honor this and many error more conservatively. 

There are also "non-qm" loans where no DTI is calculated and it's entirely predicated on the rental income of the property. These have very high rates and fees, but still less than hard money. Call it half way in between the two. I've done the math several times, 3 or 5 years of interest at the higher rate will generally cost you more than you saved in taxes by being "creative," if that is the case.