Mortgage Tips for Employees and Independent Contractors

In my other blog posts about financing and lending, Jeff Suter of CMG Financial and I discussed different topics to help educate people about the lending process and how they can purchase a home. One of the things that people ask quite a bit is what is the difference between trying to get a loan as an employee versus being an independent contractor.

The Difference Between an Employee and an Independent Contractor

According to the taxation and finance website Bench.co, employees get paid a regular wage, receive employee benefits, and have their taxes withheld from those wages. Independent contractors on the other hand tend to get paid per project and are responsible for their own taxes.

Getting a Home Loan: Employee vs Independent Contractor

If you’re an employee working for somebody else you will receive a W-2 while an independent contractor usually gets 1099’s from one or more people that they worked for/with during the previous calendar year. Regardless of whether you are a W-2 or 1099, lenders will be looking for two years of work history in the same field and hopefully no job gaps. 

Mortgage Requirements for Employees

For W-2’s you can either be hourly or salaried and lenders will take your hourly wage for 40 hours per week assuming you’re full time and they will do the math to determine your monthly income. If you’re getting overtime, in order for that to be included in your income, you need to have two years of overtime history consistently and that’s going to be averaged over 24 months plus your year-to-date. 

The same thing with bonuses and commissions -  It has to be consistent over the past two years for that to be included as income. It’s always good when you have that consistency when you need that income for approval.

Mortgage Requirements for Independent Contractors

Shifting gears into self-employed, you will also need a two-year history but it’s going to be different. The primary requirement for independent contractors will be their tax returns. It’s often gonna be based on tax returns. A lot of people when it comes to getting a mortgage, don’t understand what they made as far as their wages and it does not necessarily equal their income. 

The goal here if you’re planning to buy a home and you’re self-employed is too honest on your income taxes for the prior two years and show as much income as possible. There will be lenders out there that will be looking at bank statements, loans, and similar financial data but it’s for a different kind of loan and the interest rate may be higher. 

Some lenders may have a loan program where they look only at bank statements and not tax returns so talk to a lender ASAP to see what options are available. Really good lenders will be able to review your most recent information and help you determine the next best steps moving forward to help you qualify sooner rather than later. 

If you do better on your next couple of tax returns, you can refinance that into a conventional product or conforming loan product.

Get in touch with a local real estate agent and lender 

We’re here to guide you and help you achieve your home buying goals. Give me a call me at (615) 930-0313, schedule a call with me, or send me a message! I love helping people and using my financial and legal background to guide you in finding your dream home!