A 1099 loan is a non-QM mortgage designed for borrowers who earn income as an independent contractor or 100% commission-based worker and receive IRS Form 1099s instead of W-2s. In a 1099 loan in mortgage lending, qualifying income is calculated using one or two years of 1099s and required 1099 transcripts, rather than traditional full-doc income paperwork.
For mortgage brokers and loan officers, this program is a great way to help a strong self-employed borrower qualify when standard tax-return underwriting doesn’t tell the full story.
Below is a broker-focused breakdown of how a 1099 loan works, when it makes sense, and what you’ll want to lock down early so the file stays clean.
What “1099 Income” Means in Mortgage Lending
In lending terms, 1099 income usually means the borrower is paid as a contractor or commissioned worker and receives an annual 1099 from the company that pays them.
The key takeaway for brokers: even though the borrower may not be “W-2 employed,” the income can still be stable, predictable, and very financeable in the non-QM world when it’s documented the right way.
Who a 1099 Loan Is Built For (Best Borrower Profiles)
Common broker scenarios where this shines:
- A high-earning salesperson paid 100% commission
- A contract-based professional (healthcare, consulting, tech, project work)
- A borrower with consistent 1099 history who doesn’t want the tax return deep dive
This is a great fit when your borrower earns real money, but their write-offs or tax strategy make traditional qualifying difficult.
Why Mortgage Brokers Use 1099 Loans (The Real Advantage)
The biggest broker-friendly benefit of a 1099 loan is that it can create a more direct path to qualifying income using:
- 1 or 2 years of IRS Form 1099
- 1099 transcripts
- A defined expense analysis method
Instead of getting stuck explaining why tax returns don’t reflect the borrower’s true earning power, you’re qualifying off what they were actually paid.
And that’s a huge win when you’re trying to help borrowers with strong income but messy documentation.
What Underwriting Uses to Qualify Income on a 1099 Loan
This program typically uses 1-year or 2-years of IRS Form 1099 and 1099 transcript(s).
Then income is calculated using the 12-month or 24-month average from the total 1099 amount, minus expenses based on one of the approved methods:
- 90% Net Margin (10% Expense Factor)
- 3rd Party prepared P&L
Prepared by CPA, EA, PTIN, accountant, or tax preparer
Qualifying income is the 12 or 24 monthly averages from the total number of 1099s minus the expense factor from the method chosen above.
This gives your client two lanes:
- Keep it simple with the 10% expense factor
- Or use a third-party P&L whenthe borrower’s business reality needs a cleaner explanation
The 2-Year History Requirement Brokers Should Confirm Up Front
A minimum 2-year self-employment history is required, documented from the Employment section of the loan application.
This doesn’t mean the borrower needs to be at the same company the entire time, but it does mean you need a clear story that supports:
- Consistent self-employment/1099work
- Same general line of work
If the borrower recently changed industries, it’s smart to take a closer look upfront and confirm the income and employment story is solid before positioning the file as a strong approval.
YTD Earnings: What Brokers Need to Document (This Is Where Files Win or Stall)
YTD earnings must be documented to support ongoing receipt of income. Acceptable documentation includes:
- Checks or a single check stub(s) with YTD totals, or
- 3 months of bank statements, or
- YTD earnings statements from the 1099 business
The deposit test brokers can’t ignore:
- YTD earnings from deposits must be at least 80% of qualifying income.
- This is one of the biggest broker value moments: If you validate deposits early, you prevent the “looks great on paper but doesn’t support in the bank” surprise later.
Seasonality isn’t a deal-killer:
If earnings are impacted by seasonality, it may still be considered with documented compensating factors.
The trick is to frame it properly from the start, not after the underwriter flags it.
How Much Can YTD Increase vs Prior 1099s?
YTD earnings may be averaged with validated 1099(s) with a 25% maximum increase.
So, if your borrower is claiming a big jump in income this year, you’ll want to:
- Confirm it’s within the limit
- Show proof with deposits or earnings statements
- Include a quick explanation when needed (promotion, expanded territory, new contracts, etc.)
Transcripts Are Required (And What “No Return Found” Means)
1099 transcripts are required for most programs. If the transcript comes back as “No Return Found”, alternate evidence is required.
From a broker strategy standpoint, this is where you want to get proactive and ask early:
“Have you had issues pulling transcripts before?” Because if you catch it up front, you can structure the submission cleanly instead of scrambling mid-file.
Common Broker Mistakes That Slow Down 1099 Loans
Most 1099 loan issues come from mismatched expectations, not bad borrowers.
Here are the big ones to avoid:
Mistake 1: Not validating deposits early
When deposits don’t align with the stated income, underwriting typically issues additional conditions to resolve the discrepancy.
Mistake 2: Treating 1099 income like W-2 income
1099 borrowers aren’t just “employed differently.” Underwriting is looking for a logical self-employed income picture.
Mistake 3: Ignoring expense method strategy
Choosing the wrong expense analysis method can create avoidable conditions and explanations.
Mistake 4: Letting YTD income get ahead of what can be supported
Big increases need clean support, and the cap matters.
How Brokers Should Position a 1099 Loan to Borrowers
The best way to explain a 1099 loan is:
“You’re still qualifying based on verified income, but the lender is using your 1099 history and required supporting docs instead of tax returns.”
You’ll get better borrower cooperation if you set expectations early:
- We need transcripts
- We need a clear 2-year history
- Deposits must make sense
- The income calculation is based on averages (not best-month earnings)
Borrowers love a simple process, but they love it even more when the broker explains it clearly upfront.
Common Broker Questions About 1099 Loans
How do I pre-screen a 1099 borrower fast before I quote anything?
Start with three things:
- Do they have a clear 2-year 1099/self-employment history?
- Can they provide 1 or 2 years of1099s plus transcripts?
- Do their recent deposits support the income they’re expecting to qualify with (80% rule)?
If those three line up, you’re usually in a strong spot.
What’s the easiest way to avoid underwriter pushback on 1099 deposits?
Get the borrower’s 3 months bank statements early and do a quick check: Are deposits consistent and do they align with the payor’s name and pattern?
Since YTD earnings from deposits must be at least 80% of qualifying income, you want deposits to tell the same story as the 1099.
When should I use the 10% expense factor vs a third-party P&L?
Use the 10% expense factor when the borrower’s income is straightforward and you want a clean, predictable calculation.
Use the third-party P&L when the borrower’s income pattern needs more context, especially if you’re trying to support stability or explain shifts in earnings using a document the underwriter can trust.
My borrower’s income is up this year. How do I keep the deal alive?
Income increases can work, but you need to stay inside the guardrails:
YTD earnings may be averaged with validated 1099(s) with a 25% maximum increase.
So, your job is to document the YTD income properly and set borrower expectations early if they’re trying to qualify based on a big jump in earnings this year.
What should I do if the 1099 transcript comes back “No Return Found”?
Don’t panic, but don’t ignore it either. Transcripts are required, and if “No Return Found” comes back, alternate evidence is required.
Best move is to flag it early and collect what’s needed right away so you don’t lose momentum mid-file.
How do I explain the 80% YTD deposit rule to a borrower without losing them?
Keep it simple:
“The lender just needs to see your income is still coming in consistently this year, not just last year.”
Since deposits must support at least 80% of qualifying income, it’s really about proving income is ongoing and stable.
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