Stated-Income

Are Tax Returns Needed to Refinance Your Mortgage?

By

You know you have to verify your income in order to refinance your mortgage. Unless, of course, you qualify for the VA streamline or FHA streamline loan. You aren’t required to verify your income if you use a streamline program.

Get Matched with a Lender, Click Here.

But just what does it mean to verify your income? Do you need paystubs, W-2s, and tax returns?

There isn’t a straight answer to this question. It depends on the situation. Some borrowers will have to provide their tax returns, while others won’t need to provide them.

Salaried and Hourly Borrowers

Salaried and hourly borrowers typically don’t have to provide their tax returns when refinancing their mortgage. If you make a yearly salary and it stays the same all year, your lender won’t have a need for your tax returns. Your paystubs and W-2s will show the necessary information for the lender to qualify you for the loan.

Hourly employees are also exempt from providing their tax returns. Hourly employees will have to provide their paystubs covering the last 30 days and their W-2s covering the last 2 years. This way the lender can determine a 2-year average of your income. They do this in the event that your hours vary, which would give you varying income. Taking a 2-year average helps the lender account for the highs and lows that your income may experience.

Click to See the Latest Mortgage Rates.

Borrowers Paid on Commission

If you work on commission and it makes up more than 25% of your income, you will need to provide your tax returns for the last 2 years. Lenders will look at your tax returns to see if you have any unreimbursed employee expenses that they must deduct from your income. They will also look for any deductions that you take that are work-related. Lenders are required to use your adjusted gross income as it is reported on your tax returns. If you claim many deductions, it could affect your ability to secure a mortgage.

Self-Employed Borrowers

Finally, we have self-employed borrowers. These borrowers definitely need to provide the last two years of their tax returns. Just like borrowers paid on commission, lenders need to determine the adjusted gross income of the self-employed borrower.

Because the lender will use your AGI as reported on your tax returns, it works to your benefit to avoid taking too many deductions during the 2 years leading up to your loan application. Even though this will increase your tax liability temporarily, it will also increase your chances of securing a mortgage.

Don’t worry if your lender asks for your tax returns. It’s just another way for them to verify your income. As long as your tax returns are legitimate and they reflect what your paystubs and/or W-2s already show, you are in good hands. The lender will use your tax returns to calculate your gross monthly income, which they then use to determine your debt ratio. This is the lender’s way of determining if you can afford the loan and if you are a high risk of default.

Click Here to Get Matched With a Lender.

The Real Reasons to Use an Alternative Documentation Loan

By

Documents

You don’t need perfect credit or a W-2 to secure a mortgage. Alternative documentation loans allow some flexibility in qualifying for a mortgage.

Read on to see what options may be available to you.

What is an Alternative Documentation Loan?

The exact definition of an alternative documentation loan depends on the lender. There aren’t any regulations or requirements for this type of lender. It’s not your A-paper or subprime loans. It’s somewhere in between. It’s a straightforward loan with the same benefits as any other loan. The difference is in how you qualify for it.

The Characteristics of an Alt-A Loan

There are many different ways you can get an Alt-A loan. With any Alt-A loan, though, you don’t provide the same documentation as a full documentation loan. In a full doc loan, you would provide:

  • Pay stubs
  • W-2s
  • Tax returns
  • Bank statements
  • Employment verification

In an alternative documentation loan, you won’t provide all of that. You might provide some of it, though. It depends on the program.

Click to See the Latest Mortgage Rates»

Instead, you’ll provide what they call “limited documentation.” Maybe you have a job that has variable income. You might qualify for the loan based on your assets alone. You’d be a good candidate for this limited documentation loan. Rather than providing W-2s and tax returns, you might just provide your bank statements.

Who Qualifies for an Alternative Documentation Loan?

Every lender has different requirements. There isn’t a blanket policy for every bank. One bank might require a credit score over 680. Another might allow scores as low as 620. It’s impossible to know unless you apply with various lenders.

The real question is who would benefit from this type of loan? Following are the most common borrowers:

  • Self-employed – These borrowers often have inconsistent income or claim a lot of expenses on their tax returns. Qualifying with full documentation probably wouldn’t occur. Even though the borrowers can afford the loan, it doesn’t look that way on paper.
  • Borrowers without a job – Some borrowers have enough assets to afford a mortgage, but don’t have employment. Without employment and a constant cash flow, it could be hard to secure a new mortgage. Alt-A mortgages can help work around this issue.
  • Borrowers with less than perfect credit –Credit history issues might prevent standard lenders from approving your loan. This might make the Alt-A loan a good solution for you. These lenders make up their own rules and can often work around issues as long as they aren’t housing related.
  • Borrowers that need a high LTV – The more you borrow, the riskier you become. FHA loans do allow LTVS up to 97.5%, but you still need straightforward income and decent credit. Combine either factor with a high LTV and you have a recipe for trouble. Alt-A loans can work around this issue.

Prepare Yourself for Higher Rates

Don’t be alarmed if you pay a higher interest rate for an alternative documentation loan. It’s the tradeoff for more flexible requirements. If you want a lender that requires perfect credit and straightforward income, you can have the low rates. If you need concessions, the lender is going to charge you for it.

This isn’t to say you’ll pay excessive interest rates. It depends on the situation. As with any other loan, shop around! Don’t settle for the first approval you receive. Make sure you comparison shop. This is especially important because you have a unique loan type. You aren’t looking for a Fannie Mae or FHA loan. Each lender will have their own program.

If you think you don’t fall under the “a paper” loans, consider alternative documentation loans. More and more lenders offer them today. As the number of self-employed borrowers increases, the need for this type of lending increases.

Click Here to get Matched With a Lender»