Is your income irregular? Maybe you own your own company or you are paid on commission. Many borrowers don’t even work, but have plenty of money in investments or other bank accounts to help them afford the mortgage.
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What does a lender do if you don’t have
verifiable income on a regular basis? Are you automatically disqualified for the loan?
Luckily, there are ways you can still get a mortgage. You just have to be careful with your qualifying factors. Keep reading to learn the top five tips to help you get a mortgage despite having irregular income.
Maximize Your Self-Employment Income
If you work for yourself, you are in control of your finances. While you can’t control the sales or how much money comes into your business, you can control how lenders see your income.
At least two years before you decide to take out a loan, think carefully about the write-offs you take on your tax returns. The more expenses you write off, the less income lenders can use when qualifying you for a loan. Lenders can’t use your gross income; instead, they use the adjusted gross income or the bottom line on your tax returns. This is bad news if you report a loss even though you made money.
While it might not be the ideal situation to have a higher tax liability during the years leading up your mortgage application, it will help you get the mortgage you want. The higher your bottom line, the l
ower your debt ratio and the higher your chances of approval.
Of course, along with decent income, you’ll need a good credit score and a low debt ratio. Give yourself those couple of years to make everything look picture perfect for a lender so that you can get the loan you need.
Lower Your Debts
If you have a lot of debts combined with irregular or no income, lenders will likely look at you as a high-risk borrower. Don’t let this happen to you. Take the time to pay some debts down or off if you can. The fewer debts you have, the more money you can assign to your mortgage payment.
Again, because you have irregular or no income, lenders look carefully at every aspect of your loan. You are already considered high-risk because you don’t have a regular paycheck. If you have a large amount of outstanding debts on top of it, your chances for loan approval are slim.
Even if you can’t pay your debts off completely, do your best to pay them down. First focus on revolving debt so that you can lower your minimum payments required, which will lower your debt ratio. If you can also focus on installment loans, paying them down to where there would be less than 10 payments left, it could help your case as well.
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The prettier the picture is that you paint for your lender, the higher your chances of approval.
Report Your Tip Income
If you work on tips, you may not report all of them to the IRS. While you are supposed to report all tips received, not all taxpayers do so. At the very least, you must report 8% of your sales as tip income. But when you apply for a mortgage, you’ll want to work on reporting 100% of those tips in order to show the lender that you can afford a loan.
If you know that you will apply for a mortgage in the next year or two, consider keeping a daily tip log. This way when it’s time to file your taxes, you will have an accurate record of your tips and can properly claim them on your taxes.
Lenders use your adjusted gross income when you work on tip income. If you don’t claim your tips in order to save on your tax liability, it could prevent you from getting a mortgage approval. You don’t have to take this step forever, just the year or two before you apply for a mortgage is enough. This way you can maximize your income, which will lower your debt ratio. The lower your debt ratio is, the higher the chances of a lender approving your application.
Remember, the lender may look back at your last 2 years of tax returns, so starting this practice as early as possible will maximize your chances of approval.
Show a Consistent Two-Year History
No matter the type of job you have, the best thing to do is show the lender consistency. Even if you work part-time, if the income is consistent, a lender may accept it as long as it covers the debts adequately.
You can show a consistent two-year history by having tax returns that reflect your true income without too many write-offs for the last two years. Lenders look for increasing income that is consistent over the last 24 months. In other words, don’t claim more expenses than the year before, this will show a lender that you have decreasing rather than consistent income.
Even if your income is irregular, showing consistency over a two-year period will give a lender the best idea of what you can afford. What they do is take an average of your income. They then use this figure to determine what you can afford. This way they don’t over qualify you for a loan that you can’t afford year-round.
Maximize Your Compensating Factors
If you have irregular or no income, you need
other ways to show lenders you are a good risk. You can do this with compensating factors. The most common factors include:
- High credit score
- Low debt ratio
- Large down payment
These factors can offset your irregular income, giving lenders a reason to give you the loan you need.
It’s still possible to get a mortgage even if you have irregular income. You just have to know how to report it and what qualifying factors the lender needs. If you follow these simple tips, you should be in good shape to find a lender willing to give you a loan.
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