When considering a mortgage, many prospective homebuyers focus heavily on interest rates, loan terms, and their credit scores. However, one crucial aspect that often leads to the rejection of a mortgage application is the issue of unverifiable income. Understanding the nuances of income verification and exploring alternative financing options can significantly enhance one’s chances of securing funding for a home.
Financial institutions, particularly mortgage lenders, prioritize ensuring that borrowers can repay their loans. One of the primary methods they employ to assess a borrower’s financial stability is the verification of income. Lenders generally request a variety of documents, including federal income tax returns, W-2 forms, and current pay stubs. The objective here is to establish a clear picture of the applicant’s earnings to mitigate the risk of loan default.
According to Jacob Channel, an economist at LendingTree, sources of income that do not come with formal documentation, such as W-2s or 1099s, may present challenges. For example, income generated from rental properties, side gigs, or cash gifts intended for down payments can complicate the verification process. Such issues can deter lenders from approving a mortgage, with data from the National Association of Realtors revealing that nearly 12% of homebuyers between July 2023 and June 2024 were denied mortgages due to unverifiable income.
The landscape of mortgage lending includes various options beyond conventional loans, particularly for those whose income is harder to substantiate. Non-qualified mortgages (Non-QM) are tailored for borrowers who need more flexible verification processes. These loans often allow lenders to consider alternative documentation, such as bank statements, instead of insisting on traditional income proofs like W-2s or tax returns.
Non-QM loans may be particularly beneficial for self-employed individuals or those with non-traditional income streams. Lenders may assess applicants based on their bank statements, recent 1099 forms, or other financial assets. Although these loans afford more lenient qualification criteria, potential borrowers should remain cautious, as this flexibility often comes at a price.
While Non-QM loans can provide a pathway to homeownership, they also come with certain drawbacks. Higher mortgage rates can be a consideration; as per CoreLogic data, the average interest rate for Non-QM loans stood at 6.7% in early 2024, surpassing the 6.4% average for qualified loans. Additionally, borrowers may encounter stricter requirements, such as higher minimum credit scores or larger down payments.
Brian Nevins, a sales manager at Bay Equity, notes that while Non-QM loans offer an alternative, they might require borrowers to “jump through more hoops.” This can include providing additional documentation or navigating complex approval processes, which may deter some from pursuing this option even when they qualify.
Should your conventional mortgage application be denied, the first recommendation is to reach out to your lender for clarity on the denial. Missteps, like submitting incorrect documentation, can occasionally lead to misunderstandings. If transitions in your employment status or income sources have generated complications, communicating this to your lender may reveal applicable solutions.
Melissa Cohn, regional vice president of William Raveis Mortgage, suggests that Non-QM loans can serve as a stepping stone. For individuals transitioning into self-employment or starting a new job, these loans can initially provide the necessary funding while you establish a more stable income history.
Furthermore, it is essential to remember that securing a Non-QM loan does not lock you into a long-term financial commitment. Once you have adequately demonstrated sufficient, stable income through tax returns or pay stubs, refinancing to a traditional mortgage may be achievable, offering potentially better rates and loan terms.
Unverifiable income is a significant barrier that can hinder the mortgage application process, but prospective homebuyers have options. By exploring alternative loan types like Non-QM mortgages, potential borrowers can find pathways to homeownership even in the face of income verification challenges. The key takeaway is to stay informed, examine your options diligently, and communicate transparently with your lender to increase your likelihood of achieving your homeownership goals.