By Mike Basti, President and Mortgage Broker · NMLS #322904For a conventional mortgage, lenders calculate 1099 income by averaging your net (after-expense) income over two years from your tax returns, and won’t count it unless it’s stable or rising. A 1099 income loan (a non-QM program) instead uses your gross 1099 income with a flat expense factor (often 10–20%), so heavy write-offs don’t sink your approval. Contractors, gig workers, and commission earners usually qualify for far more with a 1099 loan.
The conventional method: two-year net average
Traditional lenders treat 1099 earners as self-employed. They take the net income from your tax returns (after every deduction), average the last two years, and only use it if it’s steady or growing. If year two is lower than year one, they often use the lower figure. The catch: the write-offs that cut your tax bill also cut the income you can qualify with.
Example: $180,000 gross 1099 income with $70,000 of write-offs = $110,000 net. Average over two years and that’s your qualifying income — even though $180,000 hit your bank.
The 1099 loan method: gross income minus a flat factor
A 1099 income loan skips the tax returns. The lender takes your gross 1099 income (from your 1099s or a year-to-date record) and applies a simple expense factor — often 10–20% depending on your profession — as your qualifying income.
Same borrower: $180,000 gross × (1 − 15%) = $153,000 qualifying income — roughly $43,000 more than the conventional net method, which can mean a much larger loan.
Which should you use?
If your write-offs are modest, conventional may give the best rate. If you deduct heavily (most contractors do), a 1099 loan — or a bank statement loan — usually qualifies you for more. A broker can run all three and pick the winner.
Bottom line: Don’t let write-offs cost you the house. If you’re 1099, ask a broker to compare the conventional two-year average against a 1099 loan’s gross-income method — the difference is often tens of thousands in buying power.
What to do when year two is lower than year one
Declining income is the most common problem 1099 borrowers hit on a conventional loan. Here is how it usually plays out, using example numbers.
| Example | Amount |
|---|---|
| Year 1 net income | $120,000 |
| Year 2 net income | $95,000 |
| Two-year average | $107,500 |
| What many lenders use | $95,000 (the lower, recent year), or they may decline |
If the drop has a clear one-time cause, such as a lost client you have since replaced, a letter of explanation and year-to-date proof can help. If not, a 1099 or bank statement loan that looks at recent gross income may fit better.
Documents to gather before you apply
- 1099 forms for the last one or two years, from every payer
- Year-to-date proof of income, such as recent payment records or a YTD P&L
- Two years of personal tax returns, if you want to compare the conventional route
- Two or three months of bank statements for down payment and reserves
- Proof you are still working with your main clients, such as contracts or recent invoices
Having the conventional and 1099-loan documents ready at once lets a broker price both routes side by side.
Who a 1099 loan fits, and who it does not
Good fit: independent contractors, real estate agents, consultants, and gig workers with steady gross income and large deductions.
Weaker fit: borrowers whose tax returns already show strong net income (conventional is often simpler), and borrowers whose income is mostly cash that never shows on a 1099.
1099 loans are non-QM. Credit generally starts at 640+, and loan amounts go up to $3M ($5M by exception). See our 1099 mortgage program. Rates change daily, so for an accurate quote call 949-379-5320 (Newport Beach) or 310-759-4757 (Marina del Rey).
Frequently asked questions
How do lenders calculate 1099 income for a mortgage?
Conventionally, they average your net (after-expense) income over the last two years from your tax returns and require it to be stable or rising. A 1099 loan instead uses your gross 1099 income minus a flat expense factor.
How many years of 1099 income do I need?
Conventional loans generally want a two-year history. Some 1099 loan programs accept one year, or even less with strong compensating factors — a broker can find the lender with the shortest requirement for your file.
Can I qualify with only one year of 1099 income?
Often yes, through a non-QM 1099 or bank-statement program, especially if you were in the same line of work as a W-2 employee before going independent. Guidelines vary by lender.
Is a 1099 loan better than a conventional loan for contractors?
Frequently, because it uses gross income with a fixed expense factor instead of your written-down net, qualifying you for more. Conventional may still win on rate if your deductions are small — compare both.
Do lenders count 1099 income from more than one client?
Yes. Most 1099 programs add up income from all payers, as long as each one is documented with a 1099 form or other proof. Steady relationships with several clients can strengthen the file.
Does switching from W-2 to 1099 with the same company hurt my mortgage?
It can on a conventional loan, since lenders may treat you as newly self-employed. Some 1099 programs are more flexible when your role and income stayed the same, so compare options before you apply.
Save Financial, Inc. — NMLS #377740, DRE #01875766. Equal Housing Opportunity. Figures are illustrative for 2026 and not an offer of credit or a guarantee of rates or approval.