Financing in 87107>Question Details

Jjgoodlander, Home Buyer in Artesia, NM

Is 1099 income or bonus/commission income different than w2 income in obtaining a mortgage and meeting the lenght of employment requirement?

Asked by Jjgoodlander, Artesia, NM Fri Sep 30, 2011

If lender has a lenght of employment requirement of 2 years, will it be a problem if part of the applicant's 2 year history is 1099 income or is reported as bonus/commission income? The job description is essentially the same and with the same employer.

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Bonus & commission income is averaged over a 2 year period. So if you are paid W-2'd income for 2 years, and if it is all bonuses & commissions, then a 2-year average of bonus income would be put into one category, and a 2-year average of commission income in the other, and then added together. It also has to be analyzed to see if there was a major increase/decrease in either category from one year to the next, as if there is a severe change it may result it only the most recent year being used or not being used.

1099 income is self-employment income like Alex laid out as it is reported to Schedule C of your personal tax returns, and most lenders require 2 years of self-employment income. So if you are paid 1099'd income, and the composite of your 1099 income is bonuses & commissions, it is all just reported as income - there is no further analysis to determine if it was per contract income, commission income, hourly rate income, a 1 time payment of income, etc... it's just simply self-employment income. The income is analyzed like Alex indicated, your gross income minus any actual expenses you claim on your Schedule C.
0 votes Thank Flag Link Fri Sep 30, 2011
yes. 1099 income is self employed income whereas w2 income is employee income. Self employed income is treated like a business whereas there are inherent costs associated with running a business. Since the lender knows that there are inherent costs associated with running almost all types of business the will take your 2 year average of your 1040 tax return income. Specifically they will look at your schedule c income which is where self employed and companies file their net profit after depreciation. (they will add back in depreciation and usually 50% of meal expenses). They will calculate a 2 year average and that will be the income given for your 1099 income. Whereas a W2 employee gets paid that figure as a gross because the company they work for has already theoretically paid expenses, a 1099 individual does not get that luxury for the reasons stated above. If the job description is the same then theoretically there should not be many writedowns against the income (however this is not usually the case since the best tax policy is to mitigate taxable income by writing down everything under the sun). Unfortunately if you tend to write off as much as possible this will hurt you in the long run when you try to get a loan.
0 votes Thank Flag Link Fri Sep 30, 2011
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