Mortgage lenders love to see borrowers with consistent, steady incomes. But not all borrowers have jobs that send a paycheck every two weeks. Of course there are plenty of self-employed entrepreneurs, but there are also people who are depend on tips for income, those who get paid by contract and also individuals who work per diem or on call. All of these situations can make it very challenging to provide proof of the steady income that mortgage lenders adore.
Fortunately, those with more creative incomes can still qualify for a home loan and it is getting easier. For example, in recent years the underwriting rules have loosened to allow borrowers to submit, in some cases, just one year of income tax documents instead of two. But there may still be some extra steps that need to be taken. Here’s how borrowers without steady income can best qualify for a mortgage loan.
Documentation
Be prepared with all the following documents before you meet with a lender:
- Two years of personal tax returns
- Two years of business tax returns and business license, if applicable
- Two years of personal bank statements and investments
More documents may be required, depending on the lender and your exact income circumstances.
Credit Requirements
Borrowers with irregular incomes have to pass credit checks just as any other buyer must. Having good credit is always going to make it easier and less expensive to obtain a mortgage.
Explain Income Inconsistencies
If a lender looks at your taxes and bank accounts and see a huge, one-time deposit or income increase, they may call it a “windfall,” which will not count towards your overall income. They try to determine what your true ability to afford and repay a loan and these windfalls are not considered reliable sources of income. If your windfalls are really more of a pattern than an anomaly, try to provide as much documentation of this as possible. Being able to explain why you expect to receive further windfalls of that sort can make a big difference to your lenders.
Employment History
A longer employment history is helpful when your income is inconsistent. Providing proof of steady employment for many years, even if self-employed, is comforting to lenders as they can verify that your income each year over that period and average it out.
Tax Deductions
Those who are self-employed, get paid by contract or depend on tips often take tax deductions that others cannot or are tempted to not fully report their income to the IRS. This can cause problems when applying for a mortgage loan because your tax returns make it look like you earn much less than you actually do. Talk to your accountant about how to best to itemize and file your taxes to best enable you to qualify for a home loan.
And of course, do not be shy about talking to us about your situation. We can offer suggestions and tips on becoming a better candidate for a mortgage.