You’ve got an income? Prove it!
You may feel like your lender’s asking a lot of you during your mortgage application process, but once you break it down, proving your income isn’t too complicated.
What Counts as Income
Proving income is easiest for salaried workers. Your salary will be what lenders look at to make sure you have enough money to afford a home. Non-salary sources of income work, too. You can provide proof of income from a second job or side business, social security benefits, pension payouts, child support, and more.
Important: Lenders need to see that these secondary sources are consistent and that you’ve reported them on your tax return. For seasonal work, lenders want to see the income annualized (evened out into equal monthly sums).
Verifying Your Employment
Of course it’s not enough to smile and hand the loan officer your coffee-stained payslips, they want to verify that stuff. This can be pretty simple — a call to your employer to make sure that:
- You reported your income accurately.
- You still work there.
- You reported your job title accurately.
After all, the lender’s underwriters are likely to raise objections about recently dismissed dog walkers who report pulling in $200,000 a year.
If you’re self-employed, your CPA will need to supply a letter saying you make what you say you make doing what you say you do.
Checking Back and Looking Ahead
Lenders also want to see some consistent history of your earnings. That could mean two years of consistently high W-2 statements and tax returns for the same position, but it doesn’t have to. You could also show a positive career trajectory that’s resulted in a steady current income that meets the lender’s requirements. On the other hand, a declining or volatile income history looks risky to lenders.
Lenders also look at the road ahead. They can’t tell the future, but it should be obvious that your work and income are likely to continue at the same, sustainable rate.
The Taxable Income Requirement
One catch that might trip you up: Not all money you make can be counted as income on a mortgage application. Lenders focus on taxable income, which can trip up both salaried workers who claim expenses, as well as self-employed business owners.
For example, if you’re a busy junior exec, you might have expensed unreimbursed travel, mileage, parking, or other business expenses on IRS Form 2106. This earns you a nice tax write-off, but reduces the income that can be included on your mortgage app by the same amount.
A self-employed web developer would be in the same boat. Saving thousands on taxes by writing off equipment, memberships, services, and office expenses would reduce what income can be considered for your mortgage.
The Stated Income Loan
One option for borrowers who might be in this situation is the stated income loan. A SIVA loan (stated income, verified assets) lets a borrower state their income without verification, but show proof of cash assets (for a down payment, cash reserves, etc.) with bank statements. A SISA loan (stated income, stated assets) is just what it sounds like — a lender would not ask for verification of income or assets.
However, these loans are hard to get and may not be worth it. You’ll still need employment verification or a letter from your CPA. Those one-percenter dog walkers will come under some pretty intense scrutiny. Lastly, if you are approved, your interest rate could be up to a half-point higher and you could be required to make an even more sizable down payment.
Still for someone who has their own successful business or earns a living through investments, this could be a good option.