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How to Qualify for a Mortgage When Your Tax Return Doesn’t Reflect Your Income

Maybe you’re self-employed, offering your freelance services to a variety of clients — and writing off whatever expenses are remotely reasonable. Maybe you’re a bartender or server who earns a significant amount of cash tips — and doesn’t always report all that monthly income (although, as a reminder, doing so is required by the IRS).

No matter the reason, if you’re someone with irregular income, or whose income is not reflected on your tax return, qualifying for a mortgage might be a bit more of a challenge than it is for the average borrower.

Still, it can be possible to achieve homeownership, even if your paperwork looks a little bit different than others’. Here are some tips on qualifying for a mortgage if your tax return and your actual income don’t quite line up.

1. If you’re self-employed, demonstrate stability.

For self-employed borrowers who don’t have W-2 income to report, demonstrating the stability and earning potential of your work is a key factor in successfully qualifying for a mortgage.

Case in point: Fannie Mae, which establishes guidelines for the underwriting of conventional mortgage loans, lists income stability, financial strength of the business, and the ability of the business to continue generating income in its guidelines for considering a self-employed borrower.

Ideally, you’ll have two years of self-employment income to report. Even if that income is fairly low (be it thanks to a generous write-off policy or the structure of your business), being able to demonstrate that you’ve been successful in the same line of work for a longer period of time can be a boon to your application. If you’re newly self-employed, it helps if you were successfully working a W-2 job in a similar field a few years prior to making the shift.

Of course, proving this income may take more than two years of tax returns. Your underwriter is likely to ask for bank statements, business expenses, and other documentation as a part of your mortgage application.

2. Make sure the rest of your financial history is solid.

Obviously, your income is your income — and most of us are working hard to maximize how much we make. There’s only so much you can do to increase your income, both on paper and in reality.

But there are definitely ways you can ensure the rest of your financial factors are in the best possible shape for your mortgage lender to review. For example, if you’re burdened with significant debt, paying down as much as possible beforehand can help not only improve your credit score, but also lower your debt-to-income ratio, or DTI — which is a key factor lenders consider when qualifying you for a home loan. After all, if you’re already paying back a variety of debts and your income appears low, it may be hard for your underwriter to believe you’ll be able to make your monthly mortgage payments. Mortgage companies are always on the lookout for these sorts of red flags!

Additionally, you’ll want to avoid applying for a lot of different loans or lines of credit at once, since multiple hard pulls on your credit report can have a negative impact on your score. Ensure you’re keeping up with monthly payments and making them in full every time: that credit score is going to be even more important than usual if your income leaves, to the lender’s eyes, something to be desired.

3. If possible, increase your down payment.

If you’re making good money — even if it’s not reflected in your tax return — you may be able to save up a more substantial down payment, which could help you qualify for a broader range of loan products.

For example, Quontic offers a unique Non-Traditional Mortgage1, specifically designed for borrowers with non-traditional income. When qualifying borrowers for this loan, we look at their holistic financial profile — not just their ability to offer proof of W-2 pay stubs. But we do require slightly higher minimum credit scores than conventional mortgages, and you’ll need a down payment of at least 20%.1

Even if that sounds like a reach, you might qualify for another type of loan, be it an FHA loan, VA loan, or even a conventional home loan.1 Along with our commitment to aiding first-time homebuyers get into their new home, we can also help homeowners refinance an existing real estate holding. Still have questions? Our mortgage specialists can help — and are standing by to guide you through the process step by step.

1Quontic Bank is not affiliated with or acting on behalf of or at the direction of Federal Housing Authority (FHA) or any government agency or government sponsored entity. All lending products are subject to approval. Rates, program terms & conditions are subject to change without notice. Not all products are available in all states or for all amounts. This does not represent an offer to enter into a loan agreement. Other requirements, restrictions & limitations apply. Information is accurate as of March 8, 2022 & is subject to change without notice.

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