Self-employed borrowers or 1099 contract workers have alternative options when it comes to financing a home purchase.  Often times the income that is calculated for self-employed borrowers or 1099 contract workers is often less than anticipated when using the traditional methods that are used for W2, non-commission employees.

The standard method for calculating self-employed income used the profit and less section or schedule C of the tax returns.  The net income from this section is averaged over the most recent two years, and used along with a year-to-date profit and loss statement.  If someone has not reported enough income on their taxes to qualify for a mortgage, the alternatives listed below may work.  They have higher down payments (anywhere from 10% – 25%) and higher interest rates, but they allow buyers to get into their dream and then sort out their taxes to refinance into a better rate.

Bank Statement Loans:  These loans work well with borrowers that have consistent deposits from their job or business that can be easily documented.  The deposits are typically averaged over 12 or 24 months and that number is usually divided in half to get an amount to be used for income.

1099 Loans:  Just like the name indicates, the borrower presents their most recent two years of 1099s and that income is used for income calculated.  This usually works will with gig workers or contract employees

P & L Loans:  Depending on the particular program or lender, the buyer normally has the previous year’s profit and loss prepared by a license CPA or either the most recent 12-month period combined with a year-to-date profit and loss statement from the CPA confirming that the buyer has been in business for two years and the CPA has been handling their financing records for the past two years.

Asset Depletion Loans:  This is usually designed for people drawing money from trust funds, entertainers, or anyone that has significant funds in the bank and they don’t want to deplete the funds to pay cash for a home purchase.  The buyer is qualified based on their credit score and the balance in their account.  In general they’ll need to have money in the bank to cover the purchase, down payment, closing cost, and 6 – 12 months of house payment.  The advantage is that they do not have to tie up all of their cash in a home purchase.