Hello everyone! My spouse and I are planning to move to a new state in just over a year when he retires. I have been a clinical social worker (therapist), a W2 employee at the same company for the past four years. I’m considering branching out on my own as a 1099 independent contractor for a different company. My salary will roughly stay the same, around $85k annually. Considering we’re currently living in a home valued at $450k with a mortgage and both of our credit scores are over 650, and my husband earns $115k annually, how challenging will it be to secure a loan for a new home next year?
You might need to wait two years or rely solely on his retirement income for loan qualification.
I’m in a similar situation as my partner is a W2 at $100k, and I’ve been a 1099 for four years. My earnings averaged $50k until 2023 when I unexpectedly made $113k. I’m concerned about being denied a loan due to what might look like income instability if they only consider the last two years.
@Colby
If your income in 2024 also shows $50k, that might be seen as a decline of over 20%, which could be problematic. If it matches your 2023 income, you should be fine.
Storm said:
@Colby
If your income in 2024 also shows $50k, that might be seen as a decline of over 20%, which could be problematic. If it matches your 2023 income, you should be fine.
That’s disappointing. Even though my income was stable at $50k in 2021, 2022, and 2024, with only 2023 being an exceptional year, it seems my lucky streak might complicate things.
@Colby
Unfortunately, lenders don’t view income spikes as sustainable, but rather as a potential sign of declining business health.
Storm said:
@Colby
Unfortunately, lenders don’t view income spikes as sustainable, but rather as a potential sign of declining business health.
I’m really worried I’ll have to delay our home buying plans.
@Colby
Consider using your 2024 tax return or a 12-month bank statement program that focuses only on 2024, avoiding the income fluctuation issue. Alternatively, delay filing your 2024 taxes until after securing the loan to maintain eligibility based on your 2023 income. There are several strategies to explore, so don’t lose hope and consult with a knowledgeable lender early on.
@Storm
I hadn’t thought about these options, thanks! Do these strategies involve significant penalties or complications?
Colby said:
@Storm
I hadn’t thought about these options, thanks! Do these strategies involve significant penalties or complications?
Tax extensions typically don’t incur penalties unless you owe and don’t make payments. It’s a common strategy for managing cash flow, especially for the self-employed with variable income. Remember, lenders primarily use your declared tax income over bank deposits, which provides flexibility in demonstrating your earnings.
Storm said:
@Colby
If your income in 2024 also shows $50k, that might be seen as a decline of over 20%, which could be problematic. If it matches your 2023 income, you should be fine.
Lenders typically average two years of increasing 1099 income for loan qualifications. A significant year-to-year increase generally isn’t problematic.
@Lennon
My income looked great in 2023, but dropped back to normal in 2024. I’m concerned they’ll focus on the drop rather than the average.
Colby said:
@Lennon
My income looked great in 2023, but dropped back to normal in 2024. I’m concerned they’ll focus on the drop rather than the average.
Lenders might ask for an explanation for the drop, but using the lower recent year’s income could still be feasible for loan approval as long as it’s justified.
@Lennon
That’s reassuring. I just hope my income can still help us qualify for a home loan. The dip was mostly due to fluctuating demand in my field.
Colby said:
@Lennon
That’s reassuring. I just hope my income can still help us qualify for a home loan. The dip was mostly due to fluctuating demand in my field.
As long as the income drop is explainable, it shouldn’t be a dealbreaker. Many lenders understand the nature of self-employed income.
It might be safer to secure the loan first and then switch to your new 1099 position once you’ve moved and closed on your new home.
Your transition to 1099 work might be scrutinized by lenders, especially if you don’t have a history in that role. A minimum of two years of 1099 income is typically required. However, certain loan programs offer flexibility but might come with higher rates due to increased risk.
@Storm
Thanks for the insight. My husband’s retirement will secure us $72K annually, which remains consistent due to the move from a high-tax state to Tennessee, which has no state income tax. I plan to continue working remotely, so my transition might be smoother.
@Colby
Maintaining your W2 employment until after the home purchase might be the best strategy. This could simplify the loan process and ensure your income is fully considered.
Storm said:
@Colby
Maintaining your W2 employment until after the home purchase might be the best strategy. This could simplify the loan process and ensure your income is fully considered.
Exactly! Secure the loan first under more predictable W2 conditions, then make any desired employment changes.