Different mortgage loan options are available for self-employed people or those without a regular income. Two popular options are the 1099 mortgage loan and the bank statement loan. But what’s the difference between these two types of loans, and which one is right for you? Let’s break it down.
What is a 1099 Mortgage Loan?
A 1099 mortgage loan is for self-employed people or independent contractors who get a 1099 form instead of a W-2 form. This type of loan allows borrowers to use their 1099 income to prove their ability to repay it.
How Does a 1099 Mortgage Loan Work?
When getting a 1099 mortgage, lenders usually need your 1099 forms from the past two years. They use this information to calculate your average annual income and determine your eligibility for the loan.
Benefits of a 1099 Mortgage Loan
- Flexibility: This loan benefits freelancers, gig workers, and independent contractors because it's based on their 1099 income.
- Less Documentation: Compared to traditional loans, less paperwork is involved.
- Tailored to Self-Employed: It’s specifically designed for those without a steady paycheck or traditional employment.
Drawbacks of a 1099 Mortgage Loan
- Higher Interest Rates: These loans can come with higher interest rates because of the perceived risk of lending to self-employed individuals.
- Stricter Requirements: You may need a higher credit score or a larger down payment to qualify.
What is a Bank Statement Loan?
A bank statement loan is another option for self-employed individuals. Instead of using tax returns or W-2 forms, lenders use your bank statements to verify your income. This type of loan is ideal for those whose income fluctuates or who have significant deductions on their tax returns.
How Does a Bank Statement Loan Work?
To be eligible for a bank statement loan, you must provide bank statements from the previous 12 to 24 months. Lenders will review these statements to calculate your average monthly income and determine your loan repayment ability.
Benefits of a Bank Statement Loan
- Alternative Income Verification: Perfect for those with irregular income or significant write-offs.
- More Accurate Representation: Reflects actual cash flow rather than taxable income.
- Flexible Documentation: Less emphasis on traditional documentation like tax returns.
Drawbacks of a Bank Statement Loan
- Higher Down Payments: Lenders may require a larger down payment than traditional loans.
- Interest Rates: Similar to 1099 loans, bank statement loans often have higher interest rates.
- Complexity: Reviewing bank statements can be more complex and time-consuming.
Key Differences Between 1099 Mortgage Loans and Bank Statement Loans
Income Verification
- 1099 Mortgage Loan: Uses 1099 forms and possibly tax returns to verify income.
- Bank Statement Loan: Bank statements are used to verify income.
Ideal Candidates
- 1099 Mortgage Loan: Best for freelancers, gig workers, and independent contractors with consistent 1099 income.
- Bank Statement Loan: Suitable for self-employed individuals with fluctuating income or significant deductions.
Which Loan is Right for You?
Choosing between a 1099 mortgage loan and a bank statement loan depends on your unique financial situation. Here are some factors to consider:
Consistency of Income
If you have a consistent 1099 income, a 1099 mortgage loan might be the better option. However, a bank statement loan could be more appropriate if your income varies significantly from month to month.
Documentation Preference
If you prefer providing 1099 forms and tax returns, a 1099 mortgage loan is the way forward. On the other hand, a bank statement loan is a better fit if you’d instead use your bank statements to prove income.
Financial Goals
Consider your financial goals and how each loan type aligns with them. If you want to buy a home fast and have bank statements, a bank statement loan could be a good option.
Real-World Examples
Example 1: Sarah the Freelancer
Sarah is a freelance graphic designer who receives 1099 forms from her clients. She has a consistent income and prefers to use her 1099 forms and tax returns to apply for a mortgage. In this case, a 1099 mortgage loan would be ideal for her.
Example 2: Mike the Small Business Owner
Mike owns a small business and deducts significant amounts on his tax returns. Although his income fluctuates throughout the year, his bank statements show a healthy cash flow. A bank statement loan would better suit Mike as it reflects his actual cash flow.
Conclusion
Knowing the difference between a 1099 mortgage loan and a bank statement loan is essential for self-employed people when buying a home. Both options have pros and cons, so it's important to consider your finances and pick the loan that suits you best.
A suitable lender can guide you through the process and help you get the required financing. Consider your income, paperwork needs, and financial goals to make an intelligent choice and move closer to owning a home.
If you are self-employed and looking to purchase a home, talk to non-QM loan experts at NASB to find out if either a 1099 mortgage loan or a bank statement loan is right for you. Call us at 888-661-1983.
