You probably know by now that the mortgage industry has really cracked down on the requirements to get a mortgage. Proof of income is usually one of the top things you need in order to secure a mortgage. But, what if we told you there are ways to get a loan without it?
It’s called alternative documentation loans. They aren’t the traditional conventional loans that you see advertised on TV. But, they are good loans that help you buy the home you want.
Keep reading to learn more about these lucrative loans.
What is an Alternative Documentation Loan?
Traditionally, you must supply your paystubs and W-2s to qualify for a loan. If you can’t provide this because you are self-employed or work on commission, you can use the alternative doc loan. As the name suggests, you don’t provide the traditional documents. Instead, you provide an alternative.
The most common documents are your bank statements. Let’s say for example, you are self-employed. You make plenty of money, but you also take a lot of deductions on your tax returns. Because you write-off so many expenses, the lender must deduct them from your income. This reduces your qualifying income. If it reduces it too much, you may not qualify for the loan even though you make enough money. The lender is required to use what you claim with the IRS.
However, a subprime lender may be able to accept your bank statements. As long as you have proof that you receive income in a regular manner, it may suffice. Say for example you make $2,000 every 2 weeks. Your bank statements show the regular deposits at the same time every other week. The lender can use that income as your gross monthly income. They will likely ask for 12 months of your bank statements in order to see that you receive the deposits regularly.
Using Investments as Proof of Income
In some cases, borrowers don’t even have a job. They have enough assets to cover their loan payments though. In this case, lenders can give you an Asset Depletion Loan. This is another alternative documentation loan. You have no proof of income, but you have proof of assets.
The lender will ask for 12 months’ worth of your investment statements. They will then likely take 70% of that amount. Let’s say you have $500,000 in an investment. The lender will use $350,000 for qualifying. That $350,000 must then get you through the life of the loan. If you apply for a 30-year loan, that’s 360 payments. In other words, $350,000 would get you a mortgage payment of $972 per month. If you applied for a 20-year term, you’d be able to afford a $1,458 per month payment.
The Other Qualifying Factors
If you don’t have any proof of income, you’ll need to show lenders that you are not a high risk. In other words, you need good compensating factors. Generally, this means great credit and a low debt ratio. But that’s not all.
Every lender has different requirements. One lender may require a 700 or higher credit score. Yet another may accept a score as low as 620. It depends on the other factors and what risks the lender can take. The same is true for the debt ratio. One lender may want a tight 28/36 debt ratio, just like a conventional loan. Another lender may allow looser debt ratios, closer to the FHA guidelines of 31/43.
In addition, lenders will want to see factors that make your loan less risky. Showing that you have plenty of liquid assets is a big compensating factor. However, if you use the assets to qualify for the loan, it’s not a compensating factor. Other factors that could make your loan look less risky is a stable job, one you’ve held for many years and a comparable housing payment, even if it is rent. The less payment shock you have, the less likely it is that you will default on your loan.
Improve Your Credit Score
One thing all lenders agree on – the higher your credit score, the less risk you pose. The more you work on your credit before you apply for the loan, the greater your chances of approval. Here are a few ways to improve your credit:
- Make sure you make all of your payments on time. Even if you make some payments late, it’s never too late to start. The more timely your payments, the higher your credit score.
- Pay your loan balances down as much as you can. It’s best if you can pay off your credit card balances. If you can’t, get the balances as low as possible. Aim for no more than 30% of your available balance outstanding at one time.
- Diversify the type of loans you carry. Don’t have all revolving credit or all installment loans. Instead, have a good mixture of each. This helps diversify your risk and show your financial responsibility.
No matter how you choose to get a loan, it is possible to get one with no proof of income. Even though the Qualified Mortgage Rules made it harder to secure a loan, it’s not impossible. Basically, lenders have to prove that they verified your income in some manner. It doesn’t have to be with paystubs and W-2s. As long as the lender can say beyond a reasonable doubt that you can afford the loan, it follows the new Ability to Repay Rules.
You may have to shop around for portfolio lenders willing to give you a loan, though. Don’t give up after one application. Instead, try applying with several lenders. See who offers you the best rate and terms. Remember, the cost of the loan is a big factor too. Sometimes it pays to take the higher rate and pay lower fees.
Take your time and find the alternative documentation loan that’s right for you!