When you request a loan, one of the most important steps in the process is for the lender to establish your income. Lenders, quite obviously, want to know exactly how much money you earn in a given month or year, as this, along with credit history, is often the best indicator of your ability to repay the loan.
It seems simple, but establishing an income can be more complicated than you might think.
For most borrowers, determining how much they make in a year or a month is easy. Most people earn a consistent wage or salary that does not change as the year goes by. Therefore, if they can demonstrate even a week’s worth of pay, they can essentially demonstrate their annual income. If, for example, someone can bring two weekly paystubs, each showing a payment of $1,000, they can demonstrate to the lender that they earn $52,000 a year (give or take). This is a simple, reliable, and common way for lenders to determine how much a person makes.
The other frequent technique, which is usually used in combination with paystubs, is to use tax returns. Tax returns, for most people, clearly demonstrate how much a person has earned throughout the year; this information is then used to calculate how much they owe to the federal government. If you bring your tax returns to the lender, they have a clearly-defined explanation of your income.
But these two documents create issues for some people.
Paystubs, while perfect for most employees, are not a consistent indicator of income for some workers and many business owners. If you work on commission, you likely have fluctuating incomes that change by the week and by the month; a single paystub is hardly an accurate reflection of your annual earnings. If you are self-employed, you likely don’t pull paystubs at all. For either person, paystubs are likely off the table when it comes to loan qualification.
Additionally, if you own a business, especially one with numerous tax write-offs, a tax return is not an accurate reflection of your income. Business owners use tax write-offs, which are provided by the federal government to encourage healthy business and employment activity, to reduce their tax burden. These write-offs, while beneficial for individual businesses and the economy as a whole, complicate tax returns from the perspective of a mortgage lender. Once again, business owners can’t use these documents for loan verification.
Fortunately, there are ways to get approved for a mortgage loan without typical paystubs or tax returns. In fact, there are six unique ways in particular that we can get you approved for a loan.
In many ways, bank statements are a far more accurate reflection of your financial health than virtually any other document. Bank statements give a layout of your deposits and withdrawals, clearly showing the lender how much you bring in, as well as how much you spend.
One of the advantages of bank statements, at least from a lender’s perspective, is that they show how much you have in savings in total, as well as your regular withdrawals. This is information that can’t be gathered from basic paystubs, and this data could give greater confidence to a lender or lending agent.
If you have had tax return issues or inconsistencies in the past, you may want to use only the most recent year of tax returns for your loan application. We offer programs that let you use only a single year of tax documents, which can have numerous benefits. First of all, it makes the process more efficient, as you only have to generate a single year of tax returns, as opposed to multiple years, which is often required by other programs. If you have had a strong year financially, using this single year, and skipping past years, could also enhance your overall borrowing potential.
If you are over 59.5 years of age, you can actually use future income distributions from your IRA accounts without a history of receipt to qualify for a mortgage. IRA accounts are a highly useful way to create a strong retirement savings, helping you save for retirement years in a tax-shielded account. Using the eventual payments from these accounts to qualify for a mortgage can be complicated, but with the right lending team it is possible.
These accounts will enhance your available money in the future, so it makes sense that you should use them if you want to establish an accurate reflection of your income.
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If you are younger than 59.5 years old, you can use asset depletion from your retirement income. This might sound like a complicated way to establish an income, but it is a fairly simple step and with the right lender can actually be handled quickly and conveniently.
You can also work with our team to use ordinary income without a distribution. This could potentially increase your overall income stated in the loan, and it could be the right technique for increasing your borrowing potential.
If you own a variety of real estate property, you can actually use the equity within this property as part of your income. This is a great way to show that you have a large income and are capable of handling more debt, even if that income is locked up in properties that you own. In many cases, this is a useful strategy for establishing income on an investment-property loan, but it can be used throughout other techniques as well.
At LendUS, we understand that every borrower is different. With that in mind, we provide personalized support and dedication to each and every loan. Whether you are looking for a conventional loan on your main residence or an investment loan to build your real estate portfolio, you’ll get the service and support you deserve from our team.
“An ‘A’ Team! We just closed on our second transaction with the Chad Baker team. They are very well organized and I can attest that they are looking out for their clients’ best needs. A special shout-out for Juliann B. who was our guide through the painful loan process. We found Juliann to be very responsive, kind, patient, and diligent in getting both our refis closed well.”
“We just closed on our second transaction with the Chad Baker team. They are very well organized and I can attest that they are looking out for their clients’ best needs. A special shout-out for Juliann B. who was our guide through the painful loan process. We found Juliann to be very responsive, kind, patient, and diligent in getting both our refis closed well.”
I hope you enjoyed reading this article. It’s my goal to keep you updated with the latest real estate mortgage news. I’m proud to provide you with 100% original and unique content. Subscribe now to get high quality real estate mortgage content and articles delivered directly to your inbox. Chad Baker is Regional Manager for LendUS. Chad is consistently recognized in the top 1% of mortgage originators in the United States 2011-2017. Got a question for Chad? Call (858) 353-8331 or submit your question online