1099 "self employed" - Trouble for conventional mortgage?

Question

Hi, This will be my first post so excuse any crude explanations or terms.

I'm in the process of starting my real estate investing career and I am looking to begin with a multi-family home (triplex or quadruplex) solely for cash flow. I'm currently employed on a 1099 as an independent contractor. However, the reality is that I am on a 1099 to save the company money. I know, bad for me and good for company in terms of tax treatment. I'm more than happy to accept this arrangement since my compensation is just over the 6 figure mark, with the potential to make more money based on performance. I receive bi-weekly paychecks and will permanently work at this company full time for the foreseeable future. I know this arrangement will hurt my chances with a traditional mortgage since I cannot provide a W-2 or traditional "steady income". What kind of lenders will over look this arrangement and provide financing based on my actual steady income and the money I have made so far at my current job?

BTW I am not a temporary employee at my company and work full time as if I were on a W-2. I have more than enough saved up for the downpayment for the price range I desire. I have read that portfolio lenders and other types of private financing are available for individuals not on a W-2. At this point, I think that may be my only option.

Any advice on how to go about this and receive the most favorable interest rate? Can I try my chances with conventional mortgages? Any responses are greatly appreciated.

Andrew Postell · Answer

@Carlos Mesa the posts above are right on.  For a "conventional" loan you will want to have right at 2 years of employment history....not the same job....just same industry.  So if you have been 1099 for 2 years but only 1 year at your job that will be ok.  One of the big trip ups is how to properly claim your income and deductions to maximize you qualifying for a conventional loan.  So I wrote an entire article in Bigger Pockets HERE . Let me know if you have any questions.  Thanks!

Bill Rice · Answer

Just to add a little additional clarity on calculating self-employment income. In my experience, this is often where self-employed borrowers run into trouble. There is a tendency for your accountant to save you a few hundred in taxes and cost you thousands on your mortgage (or disqualify you entirely).

Here are the high points:

• Lenders like to see that you have been in the same type of business for several years. 
• Averages are everything. Lenders want to see a flat or upward trajectory on your income. Otherwise, you are going to get a haircut on your monthly income calculations.
• Make sure that you are paying yourself consistent distributions. Lenders give nervous when they see inconsistent and large deposits. Steady consistent distributions from the business to your personal checking account is best. 
• You can't use business assets for down payments.

Here are a couple of additional articles that go into more depth:

• How Mortgage Lenders Calculate Self-employment Income
• Guide to Getting a Mortgage When Self-employed

Carlos Mesa · Answer

@Richard Scholtz Thank you for getting back to me on this one. This is very helpful advice, I will look into Stated income loans, it seems like they would be the perfect fit for me since it will solely be a rental property and non-owner occupied. I forgot to mention that I have about 1 year of self employment history with my current employer and I plan on making a purchase within the next 4-6 months, so I don't have much work history to go by.

Richard Scholtz · Answer

@Carlos Mesa  FNMA and traditional lenders have no problem with self employed contractors...Here in Seattle many large fortune 500 companies have contractors that have been with Boeing and Weyerhauser and MSFT year in and year out. Same with Dept of Defense at the military bases... ...have many many civilian contractors....all paid on a 1099.  After 2 years at their respective companies or the "job shop" which they contract with........they buy homes...

Most lenders need 2 years of self employment history along with tax returns showing income and what not. There are some programs that can use 1.5 years of history, but most want 2 years. You have to show income as well you can't just write everything off on a schedule C.  When you are 1099'd it is considered self-employment because you pay your own taxes and file a Schedule C with your tax return which allows you to "write off" costs of doing business or other business expenses. lenders will have  a provision to

1) give you back any depreciation as income and

2) to offset any auto payments you wrote off against your debt ratios.

Same credit score and down payment rules will apply.

If you cannot do that ---

Then look at a Stated Income Loan. The rates are 2-3  points higher then FNMA but qualifying is more based the rental income of the property being bought. Owner occupied is out. Look at a portfolio lenders....This is not hard money but 30 year financing using banks statements or some alternative STATED loan....and they use the rents to support he loan with little regard for your 1099 status.

PM me for for program parameters.... as we represent 7 lenders doing those...

1099 "self employed" - Trouble for conventional mortgage?

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