There are several reasons why your mortgage application might get turned down, and what’s known as “unverifiable income” is one of them.
When mortgage lenders assess your ability to repay a loan, they often require you to provide certain financial documents, like federal income tax returns, W-2s, and your current pay stubs, as outlined by Freddie Mac. If you’re earning money that isn’t reported on a W-2 or 1099, lenders might find it tough to pin down exactly how much you make each year, explains Jacob Channel, an economist at LendingTree.
Take, for instance, the income from a rental property you own. That isn’t always straightforward for a lender to verify. The same goes for money that’s gifted for a down payment or earnings from a side job.
It’s actually a more widespread issue than you might think. As highlighted in a report by the National Association of Realtors for the 2024 Homebuyers and Sellers Profile, about 12% of prospective homebuyers faced mortgage denials due to unverified income. This survey included 5,390 buyers who purchased a main residence between July 2023 and June 2024.
If you find yourself in a situation with various income sources or you’re self-employed, exploring non-conventional mortgage options might be beneficial, suggests Melissa Cohn, a regional vice president at William Raveis Mortgage in New York. “Fortunately, there are programs out there for people who don’t meet conventional criteria,” she notes. “But they do tend to come at a higher cost.”
For example, you might confront higher mortgage rates than usual.
### How a Non-Qualified Mortgage Works
For those homebuyers needing extra flexibility, a non-qualified mortgage, or Non-QM loan, could be the answer, according to Cohn. These types of loans approach income verification a bit differently. If you’re self-employed, a non-QM lender might use bank statements to determine your qualifying income rather than relying on a pay stub, tax return, or W-2.
“They might also check out your assets,” adds Channel.
Other lenders might accept your latest 1099 and not bother with tax returns if you own a business, Cohn explains.
However, tread carefully. While the income criteria might be easier with these loans, they often come with a price tag, warns Brian Nevins, a sales manager at Bay Equity, a Redfin-owned mortgage lender.
“You might find yourself having to clear more hurdles to secure these mortgages,” says Channel.
For instance, you may need a higher credit score or be asked for a larger down payment.
Such loans often carry interest rates higher than those of conventional loans because they don’t meet the Consumer Financial Protection Bureau’s criteria for qualified mortgages. According to CoreLogic data, in early 2024, the average starting interest rate for a 30-year non-QM mortgage was 6.7%, compared to 6.4% for a standard qualified loan.
### A ‘Stepping Stone’ for Unverified Income
Non-QM loans tend to suit individuals investing in real estate or those with substantial assets, Channel points out.
“In such cases, you can use your assets in place of active income,” he remarks.
Even if you anticipate challenges in verifying your income, it’s wise to begin with standard loan options. Should a conventional mortgage application be rejected, contact your lender to discover the reasons why, Channel advises.
“You might’ve handed in the wrong year’s W-2 form. Mistakes do occur,” he suggests.
If you’re transitioning from a salaried position to self-employment, or starting a role with a new company, a non-QM loan could serve as a “stepping stone,” explains Cohn.
Once you have enough documented income, refinancing is always an option, according to experts.
“Taking out a non-QM loan doesn’t mean you’re locked in forever,” Cohn reassures.
