Mortgage lenders are most concerned with mortgage affordability. If you can’t demonstrate that you can afford a loan the standard way, are you out of luck? If you do the right homework, you can find a lender willing to accept alternate methods of verifying your income. The bottom line is you have to verify your income in some manner. The lender has to know that you can afford the loan. But, it doesn’t always have to be the standard way.
What’s the Standard Income Verification?
A conventional or government-backed loan will require you to provide paystubs, W-2s, and/or tax returns. Without these documents, you can’t get these types of loans. They want to see at least the last months’ worth of paystubs and the last 2 years’ of W-2s. If you work for yourself or work on commission, you’ll need to supply your tax returns for the last two years.
What if you don’t have paystubs or your tax returns don’t show the ‘true’ income you make? This is when alternative loans come into play. Subprime lenders, or lenders that keep loans in their own portfolios, accept other forms of income verification.
Showing Your Mortgage Affordability Your Way
If you don’t meet the mold of the standard income verification method, you’ll have to find another way to verify your income. Lenders must verify that every borrower can afford the loan in some way. The following are the most common ways.
Bank statements are often used for the self-employed and borrower’s paid on commission. These borrowers often claim a large number of expenses on their tax returns. Because lenders use the net income reported on a borrower’s taxes, this often hurts them. Rather than using their taxes, they show their bank statements for the last 12 months.
The bank statements you use should show consistent deposits. This shows the lender that you make regular income. Of course, the income you show must be in line with the income that is standard for your industry.
If you don’t work, but rather survive on your investments, you can use your investment statements to show mortgage affordability. You’ll have to prove that you make enough income from your investments to cover the mortgage payment plus all of your living expenses. Basically, the investment income takes the place of your standard income.
3rd Party Income Verification
If you are self-employed, a letter from your CPA or tax accountant may also help you get qualified for a loan. This 3rd party can confirm the amount of income you make as well as its consistency. Usually lenders will require year-to-date Profit & Loss Statement along with the CPA letter.
What’s the Catch?
It seems too easy to qualify for a loan with alternate forms of income verification. There has to be a catch, right? There is, but it’s not horrible – you’ll just pay more in interest. Lenders base your interest rate on the riskiness of your loan. If you don’t verify your income the standard way, you are automatically riskier.
Lenders often charge more upfront on the loan as well. They may charge origination points or discount points. Origination points are points to get the loan processed and closed; it’s like an extra fee on top of the other closing costs. The discount points are points you pay to buy the interest rate down. No matter which one you pay, you pay them upfront.
Lenders use this money as instant profit. If you were to default on the loan down the road, they have the money they made upfront as a consolation prize of sorts. It’s not the ideal situation, but it helps lenders be able to write riskier loans such as these.
Today it’s a little harder to find alternative ways to prove mortgage affordability. With the Qualified Mortgage Rules along with the Ability to Repay Rule, lenders are more careful about who they lend money to. It’s always a good idea to provide compensating factors to help your case. The more stable your income and the more reserves you have on hand, the better your chances of approval. In addition, if you have a high credit score and low debt ratio, your chances of approval get even higher.