The direct answer

Lenders total your 1099 earnings over the qualifying period — typically one or two years — then apply an expense factor for business costs and divide by the number of months to get monthly qualifying income. The factor reflects that contractors cover their own costs; documenting lower actual expenses with a CPA letter can raise the income the lender counts.

The calculation, step by step

  1. Gather every 1099 from the qualifying period — 1099-NEC, 1099-MISC, and any equivalents. Missing forms must be accounted for.
  2. Total the gross earnings across all forms for the period.
  3. Apply the program's expense factor. Because contractors pay their own business costs, the program reduces gross earnings by a standard factor. The exact factor is set by the investor and varies by program.
  4. Divide by the number of months in the qualifying period (12 or 24) to get monthly qualifying income.
  5. Check the trend. If income declined year over year, underwriters typically anchor the calculation to the lower year rather than the average.

If your real business expenses are lower than the standard factor assumes, a letter from your CPA documenting actual expenses may allow the lender to use a smaller reduction — increasing the income that counts toward qualification.

Worked example

Illustrative example — not a quote or commitment to lend.

A consultant's 1099s show $110,000 in year one and $130,000 in year two — $240,000 total over 24 months. The program applies its expense factor to the $240,000 (the factor is set by the investor; the number used here is for illustration only), leaving the adjusted earnings, which are then divided by 24 to produce monthly qualifying income. Because income grew year over year, no declining-income adjustment applies. If the trend had reversed — $130,000 then $110,000 — the underwriter would typically anchor to the lower, more recent year.

Important exceptions

  • Declining income: a downward trend usually means the lower year's earnings drive the calculation.
  • Multiple 1099s from many payers are summed together — the calculation doesn't care how many clients you have.
  • Gaps in 1099 history (a year with no 1099 income) can disqualify that period or require explanation.
  • Reimbursed expenses shown separately from earnings are generally not counted as income.

Gross 1099 earnings vs. net tax-return profit

Feature1099 loan calculationConventional (tax-return) calculation
Starting pointGross 1099 earningsNet profit after deductions
Expense treatmentStandard program expense factorYour actual claimed deductions
Effect of write-offsWrite-offs don't shrink the starting numberEvery write-off reduces qualifying income
Who it favorsContractors with heavy deductionsContractors with minimal deductions

Authoritative sources

For Non-QM specifics, program guidelines vary by investor — confirm current requirements with us before relying on them.

What should I do next?

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Guidelines vary by investor and are subject to change. Educational content only — not loan advice. Not a commitment to lend.