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There are several factors that can cause your mortgage application to be rejected. One such example is so-called “unverifiable income.”
Mortgage lenders will want to know if you can financially repay your loan. One way they do that is by requesting documents such as federal income tax returns, W-2s, and current pay stubs, Freddie Mac says.
Jacob Channell, an economist at LendingTree, said money earned without being tied up in forms like W-2s or 1099s can make it difficult for lenders to verify your annual income.
For example, income earned from owned rental properties can be difficult for mortgage lenders to verify, he said. The same is true if you receive cash as a down payment or income from a side job.
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This is a more common problem than you might expect.
According to the National Association of Realtors’ 2024 Home Buyer and Seller Profile report, about 12% of recent homebuyers were denied a mortgage because a lender could not verify their income.
NAR surveyed 5,390 buyers who purchased their primary home between July 2023 and June 2024.
If you have a variety of income sources or are self-employed, it’s worth considering nontraditional mortgage options, says Melissa Cohn, regional vice president at William LaVeiss Mortgage in New York. He said it might be possible.
“The good news is there are programs available to people who traditionally wouldn’t qualify,” she says. “But it’s a little expensive.”
For example, you may have to maintain a higher than normal mortgage interest rate.
Here’s what you need to know:
How non-conforming mortgages work
Cohn said some homebuyers who need more flexibility when applying for a mortgage may benefit from non-conforming mortgages or non-QM loans.
These types of loans verify your income in a different way. If you’re self-employed, non-QM lenders can use bank statements instead of pay stubs, tax returns or W-2s to calculate income eligible for a loan, she said. Ta.
“They may also look at what assets you have,” Channell said.
Cohn said other banks and financial institutions accept the latest 1099s and don’t rely on tax returns if you’re self-employed.
However, please be careful. Brian Nevins, a sales manager at Bay Equity, a mortgage company owned by Redfin, said that while it may be easier to qualify based on income, such loans can be more expensive.
“You may have to jump through more hoops to get a mortgage,” Channell said.
For example, they may require a higher credit score or a larger down payment.
Interest rates may also be higher than regular loans. That’s because non-QM loans do not meet the Consumer Financial Protection Bureau’s standards for qualifying mortgages.
The average initial 30-year interest rate for non-QM loans in the first half of 2024 was 6.7%, compared with 6.4% for qualified loans, according to CoreLogic data.
A “stepping stone” to unverified income
Channel says non-QM loans are often suitable for people who invest in real estate or wealthy individuals with a lot of assets.
“In such cases, assets can be used in place of active income,” he says.
If you find it difficult to verify your income, it’s still wise to start with traditional loan options.
If your traditional mortgage application is denied, you should contact your lender and ask why you were denied, he explained.
“Maybe you filed a W-2 form for the wrong year. Mistakes happen,” Channell said.
But if you’re going through a transition from employed to self-employed or starting a new job with a new company, a non-QM loan can be a “stepping stone,” Cohn said. .
Experts say you can always apply for a refinance in the future if you have enough income from your returns.
“Just because you take out a non-QM loan doesn’t mean you’re stuck,” Cohn says.
