Stated-Income

How Many Months of Payslips do you Need to Get a Mortgage?

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One major factor in your ability to secure a mortgage is your income. You must show lenders that you can afford the mortgage as well as your other monthly debts and still have money left at the end of the month. Lenders need to make sure beyond a reasonable doubt that you can afford the mortgage before they can allow you to sign on the dotted line.

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Just how do you prove your income? It depends on the type that you earn. For example, if you work on commission and it totals more than 25% of your total income, the lender will need your tax returns. If your income is just a base salary or is made up of less than 25% commission and/or bonuses payslips will work.

Covering 30 Days

Your payslips must cover at least the last 30 days. Lenders use these documents to make sure your income adds up to what you say you make. It’s not enough to say that you make $60,000 per year. You have to prove it. Even if you provide your tax returns for other purposes, you must show lenders that your year-to-date income is on par with what your tax returns show.

Because you only need to cover the last 30 days, the number of payslips you must provide will vary based on your pay schedule:

  • Weekly pay – You must provide the last four paystubs
  • Bi-weekly pay – You must provide the last two paystubs
  • Monthly pay – You must provide the last paystub you received

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Paystubs Before the Closing

Some lenders may also make you provide a paystub right before the closing. This reconfirms the fact that you are still employed. This is common practice when a lot of time passes between the application and the closing. If it’s a matter of a few months, lenders must confirm that you are still employed. Some lenders just conduct a verbal verification of employment, but others may require another payslip.

The Other Income Documents

Your payslips aren’t the only income documentation lenders will require. Along with seeing your current income, they also need proof of your past income. If you make a base salary or don’t work on commission, you can provide your last two years of W-2s. These documents will show lenders your salary over the last two years.

If you work on commission or bonuses, the lender may request your W-2s a well as your tax returns. This gives them a chance to determine if you have any unreimbursed expenses that coincide with your employment. If so, the lender will deduct those expenses from your income for qualifying purposes.

This is all in addition to your paystubs. Lenders use the W-2s or tax returns to see your pattern of income. They want to make sure your income either stayed stable or increased over the last 2 years. The payslips will then confirm that you are on the same path this year as your W-2s or tax returns show.

The lender will likely ask for your payslips when they pre-approve you for a loan. They look at paystubs first and then ask for further documentation if necessary. Have your payslips ready when you know you want to apply for a loan so that you can get the process right away.

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The Dos and Don’ts of Self-Employed Mortgages

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If you are self-employed, you have to meet different requirements than the standard borrower. You probably don’t have paystubs or W-2s to provide the lender with to verify your income. Instead, you have your own paperwork, probably completed by yourself to provide the lender. As you can probably see, this is a conflict of interest, forcing lenders to ask for other documents when you work for yourself.

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Keep reading to learn the top dos and don’ts of getting a mortgage when you work for yourself.

Do Keep Careful Records

If there’s one thing that can help you as a self-employed borrower, it’s records. The more records you have, the more proof you have that can afford a loan. Lenders often ask for the last two years of your tax returns, but if you have more to provide, it could work to your benefit.

If you have an accountant or tax professional taking care of your books, you could be in an even better position. They will have a year-to-date Profit and Loss or other financial paperwork your lender may need. What you are trying to prove is that you have a steady stream of income that the lender can see rather than just a total on your tax returns.

You want to paint the picture of reliability and consistency, which careful records can do for you.

Do Start Planning Early

As a self-employed borrower, you should try to plan for the purchase at least two years ahead of time. Lenders are going to need your tax returns for the last two years. If you write off a large number of expenses on your tax returns, your bottom line will be lower than you actually make. This will work against you when you try to qualify for a mortgage.

If you plan ahead, you can minimize your write-offs for the time being. Let your adjusted gross income be higher for those two years. Yes, you will pay more in taxes, but you will be rewarded by qualifying for the mortgage you need to buy your home. Once you are in the home, you can go back to your write-offs, lowering your tax liability and even enjoying the write-offs of owning a home.

Do Pay Off Debts

Self-employed borrowers are already a higher risk than the traditional borrower. In order to make up for this risk, you need compensating factors. A low debt ratio is one of the best compensating factors you can provide.

If you have the money to pay your debts off completely, you put yourself in a better position. Of course, if you don’t have the money to pay them off in full, at least pay your debts down. Lowering your credit card debt as much as you can will help your debt ratio. The lower the minimum monthly payment is the lower your debt ratio, which puts you in a better position.

Do Have a Large Down Payment

Again, because you pose a higher risk being self-employed, the more money you can put down on the home, the better. While you can borrow as much as 95% on a conventional loan and 97.5% on an FHA loan, it’s not recommended for someone working for themselves. The lender needs to know that you have a vested interest. This way they have more assurance that you will pay the loan back.

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There isn’t a specific minimum amount self-employed borrower’s need for a down payment. The more you can put down, the better your chances of approval, though. It goes back to the compensating factors. A higher down payment means less risk for the lender.

Don’t Damage Your Credit

Pay close attention to your credit score during the years leading up to your loan application. Opening your own business can be expensive and sometimes can damage your credit. Take your time building your business and only borrow what you can afford to pay back.

If you know you did damage to your credit score, try to get it back up again. Pay your bills on time, lower your outstanding debts, and don’t overextend yourself financially. You should also avoid applying for any new credit during the year or two leading up to the mortgage application. This will help increase your credit score and show the lender financial responsibility.

Don’t Deposit Large Amounts of Money

As a self-employed borrower, your lender is going to pay close attention to your bank statements. If you do make any large deposits, make sure you have proof of their origination. For example, if a vendor owed you a large amount of money and they finally paid you, don’t just deposit in your account and not keep a copy of the check from the vendor and the deposit ticket.

Lenders are going to see the large deposit, sending up a red flag. If you have proof and an explanation for the deposit, they may allow the use of the funds. If you cannot provide proof of the payment, the lender will likely exclude the funds from those you can use for the home purchase.

Don’t Become Self-Employed Right Before Applying for a Mortgage

If you are employed now but are thinking of jumping ship and opening your own business, don’t do it within two years of buying a home. Lenders want reliability and consistency, which they need two years of paperwork to determine.

Lenders need to see that you have the experience and knowledge to succeed in the business. If you start a business 6 months before you apply for a mortgage, the lender has no history to use when determining your consistency and reliability.

Two years is the ideal length of time you should be looking for self-employed for before applying for a mortgage, but if it’s slightly less, you can try if you have compensating factors as discussed above.

Getting a mortgage as a self-employed borrower isn’t impossible, but it does require more work. The better you set yourself up beforehand, the more likely it is that you will get the loan you want. Use these tips to help you situate yourself for success.

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What Can be Used as Proof of Income?

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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.

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Can you Buy a Home Without Proof of Income?

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Signing a contract

If your income is rather sporadic or you don’t have paystubs/W-2s to prove your income, it may be hard to get a mortgage. Prior to the housing crisis, lenders were very lenient with who they lent money to for a mortgage. Today, it’s a different story. The housing crisis killed the idea of accepting any type of mortgage without proof of how you will pay for it.

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It all comes down to the Qualified Mortgage and Ability to Repay rules. The Qualified Mortgage Act requires that lenders make sure applicants meet certain requirements before they can take out a loan. The rules are strict, which means fewer borrowers will qualify. In exchange, however, lenders are protected from lawsuits should a borrower default on their loan and lose their home.

Not all lenders follow the Qualified Mortgage rules, though. They choose to take a chance and allow less stringent guidelines. However, no matter what a lender decides, they have to follow the Ability to Repay Rules. Basically, this means the lender can prove beyond a reasonable doubt that you can afford the loan. In other words, they need proof of your income.

Don’t worry, though, there are ways around it. You don’t have to be the paystub and W-2 employee to get a mortgage. There are other ways you can prove your income and still get a loan.

Use Your Tax Returns

If you are self-employed, lenders will need to see your tax returns. They’ll usually ask for two years’ worth of tax returns. This allows them to see your income over that time and take an average. It also allows them to see what expenses you write off, as they will take those expenses right off your income as well.

Your expenses are one area that your tax returns could hurt you. Even though it’s perfectly legal to write off certain expenses to lower your tax liability when you own a business, it could hurt you when you apply for a mortgage. Lenders are required to use your net income reported on your tax returns, not the gross income you claim. It’s to your advantage to hold off on writing off those expenses in the year or two before you know you will apply for a mortgage.

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Use Your Bank Statements

If your tax returns won’t yield the greatest results when you apply for a mortgage, consider using your bank statements as proof of income. This works well if you are self-employed or even if you work for someone but are paid commission or bonuses.

Your bank statements need to show consistent deposits in order for the lender to use the income as you state it. Regular deposits at the same time each week, every other week, or month will show the lender the consistency of your income. Lenders often use this money at the value of the deposits unless there is a reason to deduct unreimbursed expenses.

You’ll Need Compensating Factors

No matter which category you fall into, you’ll need to show the lender that you have compensating factors. For them to take your loan at face value without standard proof of your income is a big risk for them. In order to offset this risk, they need to know that you are a financially sound risk. You can prove this by:

  • High credit score – The higher your credit score, the financial responsibility you show the lender. Try increasing your score as much as possible during the time leading up to your mortgage application. The lower your credit card balances, and the more timely your payments, the better your score will be.
  • Low debt ratio – The lower your debt ratio, the lower risk you pose to a lender. If a lender is willing to take your alternative form of income, they want to know that you are not overextended on your debts. Staying below the program maximums will help your chances of approval.
  • Stable income – It’s hard to have stable income when you work for yourself or on commission, but making it as stable as possible is important. However, there are ways to prove stability even before you started your own business. The more experience you have in the industry you open your business in, the more reassurance it gives the lender that you are a good risk.

Proof of income is a vital component of the approval process for a loan, but there are ways around the ‘normal practices.’ You’ll need to find a subprime or alternative lender that is willing to think outside of the box, though. Your big box banks are going to have the stricter guidelines when it comes to income. It’s the smaller banks that have the ability to make their own rules because they keep the loans that will suit you best in this case.

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Low Documentation in Loans: Is Less More?

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Low Documentation in Loans- Is Less More?

Stated income loans are sometimes called low documentation loans or even no documentation loans because they require loan applicants to produce less than the usual voluminous mortgage paperwork. A good thing for borrowers yet a red flag for those worrying about another mortgage crisis. Is it really that bad to go for a loan requiring fewer documents? Is less more?

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Low Documentation Saves Time Every Time

A document less is a huge relief if you think of the time and effort spent in compiling and collecting documents for your mortgage application file. The documents that you’ll need for low doc loans would depend on your personal circumstances and your lender.

Applying for a stated income loan usually entails the following documents: the Uniform Residential Loan Application (URLA), appraisal, credit report, rental history, tax returns or W-2 forms, CPA letter, flood insurance, homeowner’s insurance, title recording documents, and bank statements.

But Substantiate Your Income

In an era where the ability-to-repay and other standards rule, declaring your income as such means having the necessary proof to back your claim up. In fact, documentation requirements that prevented all income and assets to be verified make one reason why loans become non-QM. If you fail to meet the income requirements of the lender, you might not be approved for the loan.

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If you are a salaried employee, pay stubs and Form W-2s are generally required. If your income is made up of commissions or bonuses, ready your income tax returns covering two tax years. Lenders may still require tax returns to see if the information on the pay stubs and W-2s match. They could also request for tax transcripts for income verification purposes.

Bank statements are an alternative way to gauge your financial capability. Looking at your bank accounts, lenders see your spending or saving patterns; they’d likely want to see you have enough in reserves to support your mortgage payments.

Even if you apply for a low doc loan, expect requests for additional documents from your loan officer as he/she verifies your financial information. What low documentation loans afford you is the flexibility to provide other forms to show that you the means to repay your mortgage. Ask your lender about it.»