Qualifying for a mortgage can already feel like a challenge — and that’s for traditional borrowers who earn regular monthly income on a plain ol’ W-2 paycheck. If you’re one of the millions of Americans who freelance or work on the gig economy, or have an up-and-down income for any other reason, you may feel like you’ll never get the keys to your dream home.
Fortunately, that’s not necessarily the case! Although mortgage lenders who qualify homebuyers with inconsistent incomes may have some extra requirements to meet or documents to be filed, it’s totally possible to find the home loan you need, even if you’re a little bit more creative about making your living.
Here’s what you need to know.
Is it possible to get a mortgage with inconsistent income?
Whether you’re an independent contractor, a small business owner, someone who receives a large chunk of their income by way of tips, or any other flavor of self-employed, you may have the capital to buy a home… but not the steady, consistent income so many home lenders look for when drafting a conventional mortgage.
The good news is, if you can demonstrate your financial stability in other ways, many lenders will still cut you a deal. They’ll just be relying on other markers, like your work history, credit score, debt-to-income ratio, and possibly letters of explanation that can help a lender understand your income inconsistencies or the nature of your employment.
What kind of documentation will I need to provide the lender?
As part of almost any mortgage loan deal, the lender will require a number of documents as part of the underwriting process. Gathering financial information is how the lender assesses the risk they take by offering a borrower a loan.
Conventional loans must abide by guidelines issued by federal government agencies, such as Fannie Mae and Freddie Mac, which include specifics about assessing a borrower’s ability to repay — guidelines that got stricter after the 2008 financial crisis. But individual lenders have a lot of freedom when it comes to how they calculate that ability and ensure their risk in providing the loan is a measured one.
Thus, in the process of qualifying for a mortgage with an irregular income, you’ll likely need to supply a variety of financially related paperwork. You might not have regular W-2 pay stubs to offer, but you might still be asked to provide information such as:
- Two years of personal tax returns
- Two years of business tax returns (if applicable)
- Several months of bank statements
- Information about other assets, such as investments or existing real estate
Your lender will likely also calculate your debt-to-income ratio, or DTI, which is a measure of your total required monthly debt payments as compared to your monthly net income. The calculation includes debts like credit cards and student loans as well as housing payments, alimony, and other required monthly payments. This helps a lender understand whether or not a mortgage payment is truly affordable in your current budget, regardless of how much income you make.
Your lender may have additional requirements, as well. You may be asked to write a letter of explanation in order to account for major swings in your income history, or your employer may be asked to provide a letter to explain the way you receive your earnings if you, for example, work for commission. Always check with your underwriter or mortgage broker directly to ensure you’ve provided all the necessary documentation and information required.
What credit score do I need to get a mortgage with an irregular income?
It’s highly likely that your lender will pull your credit history, including your credit score, when qualifying you to buy a house.
While minimum credit score requirements vary depending on which lender you borrow from, generally speaking, a higher credit score may lead to more favorable loan terms, including lower mortgage rates and higher loan amount caps. There may also be a certain minimum credit score that can disqualify you from receiving a loan at all.
That said, your credit score is just one part of your overall financial profile, and many lenders are willing to look past an imperfect credit history if you have other qualifying financial factors. When you have an inconsistent income, your lender might require more information than they would of other borrowers, but this just gives you a better opportunity to give them a holistic look at your financial standing.
What about gift funds or windfalls?
If you’re planning to use gifted funds or some other windfall of money as part of your down payment, or simply to demonstrate your amount of liquid wealth, it’s worth proceeding with a little bit of caution: along with seeing that the funds are in your account, your lender may also be interested in how long they’ve been there, as well as where they came from.
The amount of time a specific chunk of change has been in your bank account is also known as seasoning — which is to say, the longer some money has been in your account, the more seasoned it is.
Your lender may require a certain level of seasoning before the money can be counted toward your asset total or used toward a down payment. In the same vein, a lender may limit how much of a down payment can be covered by gifted funds, or who those gifted funds come from. (For example, gifts from an immediate family member may be looked at more favorably than those from a friend). So if you’re planning to apply these kinds of asset sources toward your mortgage loan, you’ll want to get those ducks in a row earlier in the process than later!
Which lenders offer mortgages to irregular income earners?
Although mortgage lenders are required to assess a borrower’s repayment ability, and to gather the information and documentation necessary to perform that assessment, there are still lenders out there who provide loans to those whose paperwork looks a little bit different.
You may have heard of no-doc mortgages, for example; although you’ll likely be hard-pressed to find a lender willing to offer you hundreds of thousands of dollars without any documentation, it is possible to find lenders with more flexible criteria.
Quontic, for example, offers a unique line of Community Development Loans, which are specifically formulated to help put mortgage loans — and house keys — into the hands of soon-to-be homeowners who might not have all the traditional markers of financial success (like a steady income), but are nonetheless worthy and capable of repayment.
Quontic is one of only 3% of banks in the United States with a Community Development Financial Institution (CDFI)1 certification. That means it’s an inextricable part of our mission to offer financial services to underserved communities, including self-employed borrowers, immigrants, low-income families, first-time buyers and others. We also offer FHA loans, VA loans1, and a variety of other programs with competitive mortgage rates and affordable monthly payments. We offer loans for first-time homebuyers as well as those looking to refinance existing properties, as well.
So even if your paycheck situation is a roller coaster, hang on tight: the right loan is out there! Our team of customer service professionals is standing by to answer any other questions you might have.