Today everyone has to supply proof of income for a mortgage. The days of stated income or no verification loans are gone. The Dodd-Frank Act ensures that every lender determines that borrowers can truly afford the loan rather than just taking their word for it.
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So what do you need to show that you can afford the loan? Luckily, it’s not just paystubs and tax returns, although those definitely help. There are a few ways you can show lenders that you can afford the loan.
The Standard Proof Of Income
The standard proof of income is one month of paystubs and 2 years of W-2s. The paystubs show lenders your current income and the W-2s show lenders your history of income over the last 2 years. You’ll need to provide W-2s for every job you’ve held over the last two years. The lender will take an average of that income and compare it to your current YTD on your paystubs to see if you are on track with your past income.
Proving Self-Employment Income
What happens if you don’t work for someone, so you don’t receive a paycheck? If you are self-employed, the lender can’t take your word for what you make – that’s a conflict of interest. Instead, they rely on your tax returns from the last 2 years. Your tax returns show lenders how much income you claimed as well as what expenses you wrote off to lower your tax liability.
This can be a double-edged sword situation. If you write off a large amount of expenses, it will bring your net income down. Unfortunately, in this case, lenders must use your adjusted gross income – they cannot use your gross income because the expenses come out of your own pocket. This could mean that your reported income is much lower than what you actually make. This could make it harder to secure financing.
The best way around it is to lessen the amount of expenses you write off for the year or two leading up to your mortgage application.
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Proving Other Income
There are also other situations where you might need to provide proof of other income, such as:
- Commission – If more than 25% of your income comes from commission, you’ll need to provide your tax returns. This will let the lender see an average of what you make as well as account for any unreimbursed employee expenses, which often happens with commission-based income.
- Part-time income – If you work part-time, you may be able to qualify for the loan, but you’ll need at least 2 years of proof of the income. You can get away with providing your paystubs and W-2s for this situation, but remember the lender will take a 2-year average of your income. This will help them account for the seasons of many hours and the seasons with fewer hours.
- Alimony or child support – You are not obligated to disclose the amount of alimony or child support that you receive, but if you want to you can. You will need to provide a court-ordered document showing the income you should receive as well as proof of receipt of the income. Your bank statements showing the deposits in the exact amount shown on the court order should suffice.
- Rental income – If you receive rental income for at least 1 -2 years, you may be able to use it for qualifying purposes. You’ll need to provide the lender with proof of the executed lease and proof of receipt of the income. Your bank statements and tax returns are usually sufficient to prove this type of income.
The Exception to the Rule
If you can’t use your tax returns for qualifying purposes because you have too many write-offs, you may be able to get away with it by securing a non-conforming loan. They are otherwise known as alternative document loans. These loans, which lenders keep on their books, have relaxed guidelines.
Some private lenders are willing to accept your bank statements as proof of income in the place of tax returns and/or paystubs. You’ll generally have to provide a full year’s worth of bank statements to show the regular receipt of income. The benefit of using this method is you don’t have to worry about expenses being deducted from your income. In other words, you can use your gross monthly income for qualification, just as you would if you worked for someone.
Proving ample proof of income is crucial for your success in your quest to get a mortgage. Lenders have to be sure beyond a reasonable doubt that you can afford the loan. If you have issues with your income, try finding a subprime or alternative documentation loan that will provide you with the loan that you need.