Find out how unverifiable income can impact your mortgage options and how to handle it!
Several issues can cause your mortgage application to be rejected, and one of the most common is “unverifiable income”. According to the National Association of Realtors (NAR) 2024 Profile of Homebuyers and Sellers, 12% of recent homebuyers were denied mortgages because lenders couldn’t confirm their income.
Mortgage lenders need to ensure you can repay the loan, which is why they request financial documents such as federal income tax returns, W-2 forms, and current paychecks, according to Freddie Mac.
However, any income that isn’t tied to standard documentation, like a W-2 or 1099, can make it challenging for lenders to confirm your earnings, according to Jacob Channel, an economist at LendingTree. For example, income from rental properties, gifted money for a down payment, or side hustles may be hard for a lender to verify, he noted.
If you’re self-employed or rely on various income sources, you could consider non-conventional mortgage options, advised Melissa Cohn, regional vice president at William Raveis Mortgage in New York. However, they typically come with higher costs, such as elevated mortgage rates, she added.
How a Non-Qualified Mortgage Works
Non-QM loans are often ideal for real estate investors or individuals with significant assets, Channel said. These loans verify income differently. For instance, if you’re self-employed, a non-QM lender can calculate your income using bank statements instead of the usual ways. “They might also look at what kind of assets you have”, he added.
However, non-QM loans can come with additional costs. These loans often have higher interest rates because they don’t meet the Consumer Financial Protection Bureau’s (CFPB) guidelines for qualified mortgages. In the first half of 2024, the average 30-year interest rate for non-QM loans was 6.7%, compared to 6.4% for qualified loans, according to CoreLogic.
Even if you suspect your income might be hard to verify, it’s wise to start with conventional loan options, Channel advised. If your application is denied, reach out to the lender to understand the reasons. “Maybe you submitted the wrong year’s W-2 form”, he noted.
For those transitioning from traditional employment to self-employment or starting a new job, a non-QM loan could serve as a temporary solution, Cohn suggested. Once your income becomes verifiable through tax returns, you can apply for a refinance to secure better terms, she added.
“Just because you take out a non-QM loan doesn’t mean you’re stuck”, Cohn said.