Getting a mortgage requires a lot of paperwork. When you apply for a traditional mortgage loan, mortgage lenders will check your credit score and debt-to-income (DTI) ratio. They’ll also want to see proof of income, like your pay stubs, W-2s and tax returns.
Unfortunately, you can’t just tell a lender how much you earn. Lenders are obligated to collect information about your income, verify it and use it to determine how much money you’re qualified to borrow and can afford to pay back.
But, if you’re one of the millions of people who are self-employed, seasonally employed or get paid based on commission, providing income verification can be challenging. Fortunately, some loans make it easier to prove your income because they accept alternative verification.
What Happened to the Stated Income Mortgage Loan?
In the lead-up to the 2008 housing market crash, stated income mortgage loans became very popular.
Originally, these loans were intended for borrowers who wouldn’t qualify for conventional mortgages. With stated income loans, borrowers didn’t need to provide proof of income. They only had to “state” their income on their applications (hence the loan’s name).
Because the loans cleared the income verification hurdle for so many borrowers, many ended up taking out mortgage loans that would eventually become unaffordable. Stated income loans ended with the collapse of the housing market and the Great Recession.
Since then, greater regulation and transparency requirements have made these loans illegal for owner-occupied properties (aka primary residences). The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act made the ability-to-repay rule a key consideration for mortgage lenders.
Today, it’s illegal for a lender to offer a mortgage without confirming the borrower’s ability to repay the loan.
What Are Alternative Verification Loans?
Like any other mortgage loan, alternative income verification loans (aka limited documentation loans or bank statement loans) require proof of income and ability to repay the loan.
There are also no-income verification loans, which are reserved for real estate investors and borrowers with alternative revenue sources. The critical difference between conventional mortgage loans and alternative and no-income verification loans is what qualifies as proof of income.
How Do You Qualify for an Alternative Income Verification Loan?
Conventional loans usually require a borrower to provide their most recent pay stubs, tax returns and W-2 forms. With alternative income verification loans, borrowers are asked to provide bank statements or other documentation as proof of income.
Lenders may also require:
- Higher than average credit scores (680+)
- Higher down payments (between 10% and 30% down)
- Larger cash reserves
But be forewarned: These loans usually come with higher interest rates than conventional loans.
Who Can Benefit From These Types of Loans?
Not all of us work in traditional, salary-based jobs. Alternative income verification loans might be a better option for people who work outside the bounds of conventional 9-to-5s, including:
Self-employed or seasonal workers
If you’re a self-employed borrower with your own business or work as an independent contractor, you may not be able to show consistent income because you:
- Get paid by the project: If you’re paid on a project-by-project basis, you may get large sums of money at certain times of the year and have little or no income at other times.
- Work on a seasonal basis: If you’re a landscaper or run a snow removal business, you may have a busy season and a slow season.
- Are paid on a commission basis: If you’re in sales, you may make more money if you work on commission. But you may only get paid at the end of the month or quarter or when you close on a deal.
To qualify for an alternative income verification loan when you’re self-employed or a seasonal worker, you’ll need to provide the lender with proof that you’ve been in business for over 2 years.
You’ll also need to provide a business license, a breakdown of your profits and expenses and a signed letter from your CPA or another tax professional confirming that your business is active.
Home flippers and real estate investors
If your business is buying real estate and flipping it for a profit or you want to buy an investment property, there are situations when you may not have the money to buy the home outright.
For investors who want to buy property quickly, getting a conventional loan fast can be a challenge if you can’t document your income or your income streams are complicated.
Alternative or no-income verification loans are helpful because borrowers can skip the intense income verification process during the underwriting stage.
If you earn your money through investments (like rental properties or investing in businesses), you may be doing well, but find it hard to show proof of income. Or, if you have multiple businesses and file multiple tax returns, it may be time-consuming for lenders to sort them out.
An alternative or no-income verification loan may be the best option if you have sufficient cash reserves (hint: money saved). You can borrow the money you need without having to give an underwriter a detailed account of how you earn your money.
Are Alternative Income Verification Loans the Best Option?
If you’re not traditionally employed or you earn your income through alternative income streams but want to buy a home, alternative income verification loans are an option – but they may not be the only option.
Not every lender will offer you an alternative income verification loan. You may need to find a lender who specializes in this type of loan. These specialized lenders may charge more in interest and fees because the loan is considered a high-risk loan.
Today, lots of lenders who offer conventional loans understand that many aspiring home buyers are earning their incomes in a variety of ways. To keep up with the realities of our economy and the job market, many lenders are offering conventional loans to nontraditional home buyers.
Yes, there will be more documentation to provide than a borrower who is a salaried employee, but you’d be able to take advantage of the lower interest rates and credit score requirements of a conventional loan.
Consumer Financial Protection Bureau. “SUMMARY OF THE ABILITY-TO-REPAY AND QUALIFIED MORTGAGE RULE AND THE CONCURRENT PROPOSAL.” Retrieved November 2021 from https://files.consumerfinance.gov/f/201301_cfpb_ability-to-repay-summary.pdf