Bank statements, 1099s or assets: three ways to show self-employed income

If your tax returns do not show what you really earn, there are three common ways to document income instead. A bank statement loan works out a monthly income from the deposits in your personal or business bank statements over one or two years. A 1099 loan uses the 1099 forms you receive as a contractor, less a standard allowance for work expenses. An asset-based loan uses your verified savings and investments, either turned into a monthly income figure or tested against the loan. These are non-QM loans: they are not sold to Fannie Mae or Freddie Mac, so each program sets its own rules, but your income is still verified and, for a home you live in, the lender must still make a good-faith decision that you can repay.

Here is how each one works, and how to pick.

Why tax returns can undersell you

The standard way to document self-employed income starts with your tax returns. Fannie Mae’s guide generally looks for a two-year history of self-employment and two years of signed personal returns, with one year accepted in some cases, and the lender works out income from what the returns show. The trouble is that the write-offs that lower your tax bill also lower the income a lender can count.

That is why alternative documentation exists. Federal rules require a lender to make a reasonable, good-faith determination that you can repay a home loan, using reliable third-party records, and the rule’s own examples include records from financial institutions. A loan does not have to be a Qualified Mortgage to meet that test; it has to be documented properly.

Bank statement loans

The lender adds up the deposits in your statements, takes out anything that is not business income, and averages the rest by month. Personal and business statements are treated differently:

• Personal statements are usually used when your business pays you into a separate personal account. The eligible deposits usually count in full, and most programs also ask for a few recent business statements that show the transfers to you.
• Business statements are used when your income stays in a business account. An allowance for business expenses is taken off, and the result is multiplied by your ownership share.

The underwriter also looks at whether deposits are rising or falling, any returned or overdrawn items, and whether the result fits the income on your application. A large deposit needs a short letter from you, and it must fit your business.

1099 loans

For independent contractors and commission earners. The lender uses your 1099 forms instead of tax returns, takes off a standard allowance for work expenses, and averages the rest by month. Your earnings so far this year are checked, and so is the IRS record of your 1099s, which lenders request with your written consent through the IRS’s income verification service.

Asset-based loans

For borrowers with substantial savings and investments. Nothing is pledged and nothing has to be sold; the lender reads your statements, and the home is the collateral. Programs use one of three methods:

• Asset depletion. The lender adds up your eligible accounts, counts each kind at a share of its value, takes off what you need to close and keep in reserve, and spreads the rest over a set number of months. That monthly figure is treated as income.
• Asset qualifier. No income calculation and no debt-to-income ratio. The test is whether the assets left after closing are large enough measured against the loan and your other debts.
• Added to your income. A monthly amount from your assets is added to wages, a pension or other income you document.

Fannie Mae has a version of the first idea for certain retirement and similar assets: the documented amount, after any early-withdrawal penalty and the cash you need to close, is divided by the number of months in the loan term. Non-QM programs apply their own versions more widely. Our assets-as-income calculator shows the methods side by side for the balances you enter.

How to choose

Start with how your money actually moves:

• Paid into a business account, with real expenses? Business bank statements, with the expense allowance.
• Paid into a personal account from your business? Personal bank statements are often simpler.
• Paid on 1099 forms by one or a few companies? A 1099 loan may be the cleanest route.
• Large savings, modest income? An asset-based loan, alone or added to other income.

Two other routes are worth knowing. A profit and loss statement prepared and signed by your CPA or licensed tax professional can serve as the income on some programs. And if a co-borrower earns a regular paycheck, many programs let their wages be added to your bank statement or 1099 income.

Frequently asked questions

Is my income still verified?

Yes. Each option verifies income or assets in its own way: complete statements, IRS records of 1099 forms, a signed statement from a tax professional, or account statements. Credit, savings and the home’s value are checked as on any mortgage.

Can I use these loans for a second home or a rental?

Many bank statement, 1099 and profit and loss programs allow a second home, and some allow a rental property. Most asset-based programs are for the home you live in, and some also allow a second home or a rental.

If my tax returns are in the file, can I still use bank statements?

If tax returns are in the file, the loan usually has to be reviewed as a full-documentation loan instead. Tell your loan officer which route you want before you send documents.

Do I need a job for an asset-based loan?

Not always. With an asset qualifier you do not need to show employment. With asset depletion, your assets can be your only income or be added to other income.