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AnswerHow do lenders count 1099 income?
A conventional underwriter counts the net income your returns report after business deductions, adds back certain non cash items such as depreciation, and averages the result over a period that usually spans two years. So the figure a lender may use isn't the money that lands in your account, and it's usually lower, because every legitimate write off that reduced your tax bill also reduced your qualifying income. This is the single most common reason a self employed or 1099 borrower is approved for less than they expected. The fix is timing rather than trickery: read the returns before you shop, and if they don't support the purchase, look at a bank statement loan, which qualifies from deposits instead.
The Consumer Financial Protection Bureau requires a lender to verify the source of your income, which for a business owner means personal returns, business returns, a profit and loss statement and business bank statements rather than two pay stubs. The size of the list is a function of the verification, not of suspicion.
The averaging period is what catches people who have just had a strong year. One excellent year following a modest one averages out to something in between, and a borrower who feels they're earning at their best rate is being measured partly on last year's slower version of the business.
Add backs work in your favor and are frequently missed. Depreciation is the common one: it lowers taxable income without money leaving the business, so underwriting generally adds it back. A borrower whose file was run without the add backs applied can genuinely qualify for more than they were told.
The move that helps most is the earliest one. Talk to a lender before you talk to a listing agent, and if the numbers don't work, you still have a tax year in which to decide, with your accountant, whether the trade off is worth making.
A partnership or S corporation adds another layer, because the underwriter looks at the business return as well as your personal one and asks whether the business can keep distributing what it has been distributing. Ownership percentage matters here: below a certain share you may not need the business returns at all, which is worth checking rather than assuming the worst.
Declining income is the one situation where honesty early is worth the most. If last year was smaller than the year before, an underwriter will usually take the lower figure or ask for an explanation that holds up. Dillon would rather build the file around that from the start than meet it as a condition in week three.
I read the returns first and the listing second. Nobody enjoys finding out in underwriting that the qualifying income is smaller than the income.Dillon Baker, VP of Mortgage Lending at Rate
More questions about this
Not here? Text it to 317-847-6869 and Dillon answers himself.
Can I use my gross 1099 income?
No. An underwriter works from net income after business deductions, with certain add backs, averaged over a period that usually spans two years.
What's an add back?
A deduction that lowered your taxable income without money leaving the business. Depreciation is the common one, and underwriting generally adds it back, which works in your favor.
What if this year is much stronger than last?
Averaging will pull the figure toward the middle. A shorter period can sometimes be used. Ask about your own history rather than assuming.
Ask Dillon about your situation
Text 317-847-6869 with the address or the question. He answers his own phone, evenings and weekends too.
Text 317-847-6869 or call, if you would rather skip the form.
