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No W-2? No Problem. Non-Standard Mortgage Options

Carlos J. F. Lopez, MBA, CFP®

Director of Financial Education

Last Updated
December 09, 2021

How to Get a Mortgage Without a Standard Source of Income

You may be retired, not working or self-employed and looking for a new mortgage. When it comes time to purchase a home or refinance your existing mortgage, it can be difficult to prove you have a steady stream of income from which to make mortgage payments if you don’t have a regular paycheck from an employer.

Fortunately, there are ways to secure a mortgage without having W-2 income. Certain lenders, especially non-bank lenders or mortgage brokers, may offer different products to borrowers who don’t have a W-2. While usually these mortgages are smaller in size and may come with a higher interest rate than a conforming bank loan, they present options to borrowers who wouldn’t otherwise qualify for a regular mortgage.

Lenders will want to see certain documents to aid your mortgage applications. Let’s take a closer look at a few of these documents.

  • Your tax returns – Your tax returns are very revealing as to consistency and source of income. You may be able to use your tax returns as documentation if you can prove at least two years of qualifying income.
  • Use your business documents – If your business generates a profit, your bank may accept business documents as proof that you have access to income. Common documents include your business license, profit and loss statements, balance sheets, receivables and possibly even client references. Your business tax returns will be instrumental in demonstrating income over the past several years. If you have a lot of income that is retained, that income could be considered if you are at least a 25% owner.
  • Provide bank statements – There are certain mortgage programs that accept bank statements as documentation of income. This can be a solution for business owners who take draws from the business (instead of a paycheck) and can document a history of deposits.
  • Document your assets – Some lenders offer asset-based mortgages, also called asset depletion loans, which use your liquid assets to assign an annual income. Different loan programs will carry varying guidelines around the calculation for depleting the asset base. Check with your lender to determine what your options are. Most lenders use a 15-year depletion schedule. For example, if you have $2 million in assets and are applying for a 15-year fixed mortgage, the lender may view this as an annual income of $133,333 per year ($2,000,000/15).

Tips for Improving Your Chances of Qualifying

Consult with your lender early, ideally several months in advance to begin discussions about what they want to see so you can prepare the documentation and records. While there may be ways to qualify for a mortgage without steady W-2 income, the road can be a bit more difficult and your interest rate on the applicable loan could be higher. Working with a lender early, before you submit an application, may improve your chances. Here are a few tips for preparing ahead of submitting your application.

  • Save, save, save – From a lender’s perspective, the more you have saved, the less likely you are to default on your payments. Lenders like to see that you have cash on hand should something unexpected occur.
  • Demonstrate reliable income sources – This can include tax returns, pension statements, future deferred compensation payments and even regular automatic retirement account distributions (such as your IRA). Your advisor can often produce a letter to the lender confirming your regular income streams from your brokerage or retirement account. Other forms of reliable income that a lender may consider are rental income, child support and alimony.
  • Pay down debt – Lenders often consider your debt-to-income ratio when calculating your ability to manage your debt without defaulting on your obligations. By paying down any outstanding debt, you create a more favorable debt-to-income ratio, which works to your benefit. Before you pay off any debts, check with your lender because your ratios may already be ok from an underwriting standpoint and paying off loans could actually reduce your credit score unintentionally, potentially raising the cost of borrowing or preventing you from getting a loan.
  • Explore down payment threshold options– The more money you pay up front as a down payment, the less you will need to borrow, and the more likely you are to be approved for a mortgage. Making a down payment of 25% instead of 20% can potentially reduce your cost of borrowing by ½% point in interest rates. More is always better, but again, check with your lender for the most opportunistic down payment.
  • Maintain good credit – Having a good credit score is essential to being approved for any type of mortgage but is especially vital if you don’t have W-2 income documentation. The best rates are secured by borrowers with credit scores above 740.

As with any major financial decision, there are pros and cons associated with each type of mortgage. Before deciding on a mortgage, meet with your wealth manager to discuss your options and ensure your home loan makes sense, given your overall financial situation. For questions about applying for a mortgage, or for any other financial matter, please contact us.

Considering paying off your existing mortgage? Learn about the pros and cons. Is it smart to buy real estate right now? Creative Planning CEO Peter Mallouk provides insight.

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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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