Today, securing a mortgage means you can verify every aspect of your mortgage application. This was not always the case prior to the housing crisis. Lenders used to accept what they called “stated loans.” These were loans where you could literally state how much money you made and still secure a mortgage. Those days are gone, though. Lenders want to you to verify everything now, especially in terms of your income. If you are without W-2s for one reason or another, you are not out of luck, though. You may just have to secure a non-conforming loan depending on the circumstances.
The Origin of Your Income
The lender needs to know the origin of your income. With W-2s, this is easy to verify. You receive a W-2 from XYZ Company. Your lender knows this is where a specific amount of your money came from last year. If it is enough to cover your expenses and keep your debt ratio within the designated guidelines, you should be able to secure a mortgage.
What happens if you are without W-2s, though? How does a lender know who provided your income? You cannot just say you worked for XYZ Company. Even if the company were to verify your employment there, this does not provide a paper trail for your income or the taxes you pay. Luckily, you are not without the chance to secure a mortgage yet. You still have options.
Proving your Income in Other Ways
What the lender wants to know is who is paying you and where does your money go? These are easy to prove with or without W-2s. For example, people who own their own businesses often don’t have W-2s. For whatever reason they don’t draw a salary; this means they are not required to provide W-2s. this does not mean they don’t have to claim their income, though. Everyone has to claim their income and pay the appropriate taxes. You can prove this with your tax returns. Not every type of income on your tax return has a W-2. Maybe you received 1099s or you owned your own company and operate in your own name. As long as you claim the income and pay taxes on it, you can use that as your proof of income.
You might receive your income from other sources. If you have investments, dividend income may be a valuable source of income for you. If you have a trust fund, your income could be derived from there. As long as you have a paper trail of where the money came from and why you received it, you may be able to apply for a mortgage. You can prove these situations with tax returns and/or bank statements. Of course, you have to be able to prove continuance of the funds you receive in order for a lender to use it as qualifying income. Generally, lenders want to see income that will continue for the next 3 years. For example, when a lender verifies your employment and the employer states your future employment is likely, this is enough for the lender. If you have your own business, showing a history in the business and a profitable bottom line can give the lender reassurance that you will stay in business for the near future.
Bank Statement Loans
Let’s say you cannot prove your income on your tax returns for one reason or another. There is still one more option. This is not an option you can use with any conforming loans, though. You will have to find a portfolio lender who funds loans without the help of any investors. This loan is called the Bank Statement Loan. As the name suggests, the lender tracks your receipt of income through your bank statements. You usually have to provide at least 12 months’ worth of bank statements, but some banks require up to 2 years’ to qualify you for a loan. The bank statements must show receipt of your income on a regular basis and for a similar amount. They also must coincide with whatever it is you say that you do. For example, if you say you serve hotdogs at a local hotdog stand, you cannot show regular receipt of income in the thousands of dollars every week. The lender looks for income that aligns with the profession.
If you are without W-2s, but you can verify your income in another fashion, it is a good idea to have compensating factors. These are other factors of your loan which make up for the risk the lack of W-2s cause. A few examples of these factors include:
- A low debt ratio
- A high credit score
- Plenty of assets on hand to act as reserves
- A low loan-to-value ratio (high down payment)
These factors help to mitigate the fact that your income is not as straightforward as someone with a W-2. The lender can use these factors to help lower your risk and decide to provide you with funding for your mortgage. Every lender differs in the compensating factors they prefer to see and those that they will accept. Make sure you shop around with different lenders if one turns you down. They don’t all have the same principals.
You might find you have a harder time securing a mortgage without W-2s, but it is not impossible. You may have to be creative or be willing to accept a higher interest rate or higher fees. Unless your income is easily verifiable and documented like the lender wants, these are the prices you have to pay. Down the road, if you secure a job with a W-2 income or you have more stable income you can prove with your tax returns, you can try to refinance your loan and secure a lower interest rate. Until then, look for a reputable lender willing to provide you a loan without a W-2 and purchase the house you wish to purchase.