How to handle unverifiable income when applying for a mortgage

A number of factors can get your mortgage application denied. So-called “unverifiable income” is one of them. 

Mortgage lenders want to know if you’re financially capable of paying back the loan. One way they’ll do that is by requesting documents like your federal income tax returns, W-2 and current pay stubs, according to Freddie Mac. 

Any money that you earn that isn’t tied to a form like a W-2 or 1099 can make it difficult for a lender to verify your annual income, said Jacob Channel, an economist at LendingTree. 

For instance, income you earn from a rental property you own may be tricky for a mortgage lender to verify, he said. The same can be said for things like gifted cash for a down payment or side hustle earnings.

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It’s a more common problem than you might expect.

About 12% of recent prospective homebuyers were denied a mortgage because a lender could not verify their income, according to the 2024 Profile of Homebuyers and Sellers report by the National Association of Realtors.

The NAR polled 5,390 buyers who purchased a primary residence between July 2023 and June 2024.

In such instances where you have different forms of income or are self-employed, it may be worth looking into non-conventional mortgage options, said Melissa Cohn, regional vice president of William Raveis Mortgage in New York. 

“The good news is that there are programs available for people who don’t qualify conventionally,” she said. “But it is a little bit more expensive.”

For example, you may have to sustain higher-than-usual mortgage rates.

Here’s what you need to know.

Some homebuyers who need more flexibility when applying for mortgages could benefit from a non-qualified mortgage, or a Non-QM loan, Cohn said.

Such loans verify income differently. If you’re self-employed, a non-QM lender can use bank statements to calculate the income that may qualify for the loan instead of a pay stub, tax return or W-2, she said.

“They might also look at what kind of assets you have,” Channel said.

Other banks and lenders will accept the most recent 1099 and do not rely upon tax returns if you’re self-employed in a business you own, Cohn said.

But, be careful. While it may be easier to qualify through income, such loans can be more costly, said Brian Nevins, a sales manager at Bay Equity, a Redfin-owned mortgage lender. 

“You may have to jump through more hoops in order to get those mortgages,” Channel said.

For example, you may need a higher credit score or be required to provide a bigger down payment.

The loan may also come with a rate higher than that of a conventional loan. That’s because non-QM loans do not follow the criteria of qualified mortgages set by the Consumer Financial Protection Bureau.

In the first half of 2024, the average initial 30-year interest rate for non-QM loans was 6.7%, compared to 6.4% for a qualified loan, according to data from CoreLogic.

Non-QM loans are often better suited for those who invest in real estate or wealthy individuals with a number of assets, Channel said.

“In those instances, you can kind of substitute assets for active income,” he said.

Even if you suspect your income will be hard to verify, it’s smart to start with traditional loan options.

If your application for a conventional mortgage is rejected, reach out to your lender and ask why it was denied, he explained.

“Maybe you submitted the wrong year’s W-2 form. Mistakes do happen” Channel said.

But if you’re going through a transition from being employed to self-employed, or starting a new job with a new company, a non-QM loan could be a “stepping stone,” Cohn said.

Once you start to show sufficient income on your returns, you can always apply for a refinance in the future, experts say.

“Just because you take out a non-QM loan doesn’t mean you’re stuck,” Cohn said.