The journey to homeownership can often be fraught with obstacles, and one of the most notable challenges prospective buyers face is the potential denial of their mortgage application. Among the various reasons for this denial, one of the most significant is the issue of “unverifiable income.” This article delves into what unverifiable income is, why it poses a barrier to securing a mortgage, and explores alternative lending solutions for those who may find themselves in this predicament.
Unverifiable income refers to earnings that cannot be substantiated through standard documentation such as W-2 forms, 1099 statements, or pay stubs. Mortgage lenders require this information to assess a borrower’s ability to pay back the loan, and if they cannot verify income through traditional means, they may be reluctant to approve the application. According to expert Jacob Channel from LendingTree, certain types of income—like that derived from rental properties, side hustles, or even substantial gifts for down payments—often fall into this category, complicating the approval process.
Despite these complications, a significant segment of the population faces this issue. The National Association of Realtors reported that approximately 12% of homebuyers experienced denial due to unverifiable income in their recent survey. This figure highlights a widespread dilemma as many buyers venture into a competitive housing market where documentation requirements can hinder their chances of securing a mortgage.
For those grappling with unverifiable income, alternative mortgage options exist. One such option is the non-qualified mortgage (Non-QM) loan. These loans offer a more flexible approach to income verification. Instead of relying solely on tax returns and traditional pay stubs, a Non-QM lender may consider bank statements or other financial assets to establish a borrower’s creditworthiness. Melissa Cohn, a regional vice president at William Raveis Mortgage, describes these loans as a potential remedy for those in non-traditional employment situations, such as freelancers or self-employed individuals.
The appeal of Non-QM loans lies in their accessibility, particularly for those who might struggle to provide the requisite documentation for conventional loans. However, it’s crucial to approach these options with caution. While they provide an alternative path to securing a mortgage, Non-QM loans often come with higher interest rates and may involve more stringent requirements, such as a higher credit score or a larger down payment.
When considering the costs associated with Non-QM loans, potential borrowers should be aware of the trade-offs involved. On average, the initial interest rates for Non-QM loans tend to be higher than those of conventional mortgages. In 2024, for example, the average rate for a Non-QM loan stood at 6.7% compared to 6.4% for qualified mortgages. This rate discrepancy can significantly impact a borrower’s monthly payments and overall financial commitment.
Additionally, as Channel advises, while Non-QM loans might provide a viable solution for those with unsound income verification, borrowers may find themselves navigating a more complex application process. For example, extra documentation may be required to establish assets or income streams, emphasizing the need for thorough preparation in advance of submitting an application.
Receiving a mortgage denial can be disheartening, but it shouldn’t deter potential buyers from pursuing their goals of homeownership. If you find yourself in this position, the first step is to communicate with your lender to understand the specific reasons for the denial. Mistakes, such as submitting incorrect documentation, can happen, and addressing these misunderstandings may swiftly rectify the issue.
For those transitioning into self-employment or seeking employment with a new company, Cohn suggests considering the Non-QM loan as a temporary solution. With time, as borrowers establish reliable income through tax returns, they can refinance their Initial loan, thereby taking advantage of more favorable terms in the future.
While the prospect of mortgage denial due to unverifiable income presents a formidable obstacle to many aspiring homeowners, it does not signify the end of the road. With a solid understanding of the various financing options available—including Non-QM loans—prospective buyers can empower themselves to navigate the complex landscape of mortgage lending. By taking informative steps and remaining proactive in their search for solutions, individuals can set themselves on a path toward achieving their dream of homeownership, transforming barriers into stepping stones along the way.