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Qualifying for a Mortgage with 1099-Based Income

As the gig economy becomes reality for more working adults – traditional adult amenities, such as home ownership, have become more elusive. Affording a new home is already rare for Millennials and Gen Z; but what if you can afford one, and simply lack the employment history to secure a mortgage? According to a Yello Recruiting Study:

“Generation Z (those born between 1997 and 2012) plans to move on from their current employer in three years or less, and only one in four plan to work for an employer for five years or more.”

Most mortgage lenders heavily favor borrowers with W-2s, full-time employment contracts, and high wages that show up on a tax return. For those who are part of the gig economy, (assuming you can afford one) is getting a mortgage product even possible?


Mortgage Lenders Are Tougher Than Ever

Ever since housing insecurity and subprime loans took center stage in the 2008 market crash, lenders have become a great deal more cautious with their mortgage products and federal regulations on these lenders have tightened. According to the Philadelphia Inquirer

“Indeed, lenders seem to have no stomach for a repeat of the foreclosure crisis of the Great Recession. Default filings clogged court systems, and the clumsy response led Washington to impose strict regulations on mortgage lending.” 

Obviously, tougher mortgage conditions are good for the general stability of the housing market, but they may not be so good for unconventional borrowers. 

What Mortgage Products Can You Get With 1099-based income? 

While there are a number of unconventional mortgages like FHA (Federal Housing Administration), low-down payment loans, and VA loans for combat veterans, these usually rely on W2 (wage) income as one of the main qualifying factors. 

For consultants, gig workers and retirees, there is the option of an asset depletion mortgage.  Asset depletion calculates your ability to pay mortgage payments on your liquid assets, as opposed to your income. Asset depletion takes 100% of your liquid assets or 70% of any assets in retirement accounts, which are subject to taxes upon withdrawal. Then, it divides those assets by 360 payments to determine what kind of mortgage you could afford without any proof of income or credit worthiness. 

How Can I Prove My Income Without a W2? 

Though unconventional mortgage lenders will likely charge you a higher interest rate, they can also verify your income in ways other than a W2. The most common ways to prove income for the self-employed can range from showing employment contracts, pay stubs, bank statements and past years’ tax returns. 

What Kind of Mortgage Rate Can I Get on An Asset Depletion Mortgage? 

Sprout Mortgage, which specializes in mortgages for the self-employed, estimates that you can get a mortgage rate between 5-6%, depending on other factors like credit score and debt to income ratio. This is, of course, substantially higher than traditional 30 and 15 year fixed rate mortgages which, as of this writing, sit at 3.2% and 2.7% respectively. So, expect to deal with higher monthly payments, as a consequence of being one of the “unconventionals.”