The days of “no-income check” mortgage applications are long gone. Now, when applying for a mortgage, you will need to include your income on the application itself, and provide documentation of a history of that income (usually two years). For a typical 9 – 5 job, this means copies of the previous two years’ W-2s, and a full month’s worth of current pay stubs. If you are salaried, the lender will use your current rate of pay. If you are hourly, they may use an average of the past three months (or longer) to calculate the amount of income that will be used for income verification purposes.
The lender also contacts your employer at some point before your closing (usually a day or two before your closing, but sometimes the morning of your closing) to confirm that you are still employed. This can also be done via a fax. Letting your employer know to expect that call, especially in the case of a small company, may be a good idea, and will help prevent a delay. Whether via fax or phone, the lender usually just asks for confirmation that you are currently employed by that company, and in some cases, may ask that there is a likelihood of continued employment. Many employers won’t answer that last question, but that doesn’t usually have an impact on your loan application and closing.
In the case of a self-employed borrower, or someone looking to use commissions, incentives, bonuses, and other irregular types of income, a two-year history of this income will need to be proven via complete Federal Tax Returns (including all schedules and addendums). The lender will usually calculate a two-year average of this income. You may also need to provide a year-to-date P&L depending on the situation. This is to ensure that your income is continuing at the same average level. In the case of corporate or partnership returns, you will need to provide both personal and corporate Federal returns. The lender will add back any non-cash deductions from filed income (i.e. depreciation). If you are a partial owner in a company, you are considered self-employed if you have a greater than 25% ownership in the company.
Rental income is usually documented with copies of current leases or tenant-at-will agreements. Tax returns may also be used (Sched. E specifically). You will usually need to show that you’ve been collecting rent for a full two years for it to be included when calculating your ratios. If you haven’t been a landlord for two full years, or the rent you collect is from a roommate or is an informal agreement not being reported on your taxes, you will not be able to use it towards your debt ratio calculations. Rent from a second unit in a property being purchased is usually not allowed for qualifying purposes unless you have a history as a landlord. This is due to the fact that you do not have experience managing an income property, and there is no guarantee that tenants currently in the property will remain once you’ve purchased the home.
Social Security, Disability, Child Support, Alimony and Other Income
There are a variety of income types beyond those from employment. SSI, Disability, Child Support and other income types can be used towards the income verification qualification for a mortgage. In order for them to be considered, you will need to verify receipt. In the case of Alimony and Child Support, this can mean asking the person paying those funds to provide copies of cancelled checks, bank statements, etc. for a full two years. For obvious reasons, this can be a challenge. If you don’t need these funds to qualify for the mortgage, you do not need to disclose or verify them.
Funds that are obtained illegally; money you are paid under the table, money from illegal businesses, and any other funds for which you cannot provide proof of receipt, will not be allowed as funds to qualify for your mortgage income verification.
Lack of Employment History
Having less than two years’ employment history can be a challenge when it comes to applying for a mortgage, but it isn’t always an impossible hurdle. If you’ve taken a break from the working world to raise a family, or you’ve been going to school, or you just moved to the area you can provide other types of documentation for consideration. Having multiple short term jobs, even if they were with a temp agency, still shows that you have been working, but you may be asked to provide additional documentation and explanations, and you will need to have a stable job in your field of longer term employment.
Income verification may seem a bit heavy handed and strict, but the lender wants to make certain that you have sufficient funds to cover the new mortgage, all related housing expenses, and all your other bills. Providing complete documentation in a timely manner will help to speed up the process of applying for your mortgage and getting to your closing with less stress.