Several factors can lead to a mortgage application being denied, and one of the most common is so-called “unverifiable income.”
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Mortgage lenders assess your financial ability to repay the loan by reviewing documents like federal income tax returns, W-2s, and current pay stubs, as outlined by Freddie Mac.
Income that isn’t tied to formal documentation, such as a W-2 or 1099, can pose challenges for lenders when verifying your annual earnings, explains Jacob Channel, an economist at LendingTree.
For example, rental income from a property you own may be difficult for a lender to verify. Similarly, gifted cash for a down payment or earnings from side gigs can also complicate the verification process.
This issue is more widespread than many people realize.
According to the 2024 Profile of Homebuyers and Sellers report by the National Association of Realtors (NAR), about 12% of recent prospective homebuyers were denied mortgages due to unverifiable income.
The survey, which included 5,390 buyers who purchased a primary residence between July 2023 and June 2024, highlights the frequency of this problem.
For those with diverse income sources or self-employment, exploring non-conventional mortgage options could be worthwhile, says Melissa Cohn, regional vice president at William Raveis Mortgage in New York.
“The good news is that there are programs designed for people who don’t meet conventional qualifications,” Cohn explains. “However, these options often come with higher costs.”
For instance, borrowers may face elevated mortgage rates compared to conventional loans.
Understanding Non-Qualified Mortgages
Non-qualified mortgages, or Non-QM loans, can offer flexibility to homebuyers who struggle to meet traditional lending criteria, according to Cohn.
These loans use alternative methods to verify income. For self-employed individuals, non-QM lenders may rely on bank statements to calculate qualifying income rather than requiring pay stubs, tax returns, or W-2s.
“They may also evaluate the types of assets you possess,” adds Channel.
Some lenders even accept the most recent 1099 form and may bypass tax returns entirely for self-employed borrowers, Cohn notes.
However, borrowers should proceed with caution. While Non-QM loans can make income qualification easier, they often come with higher costs, says Brian Nevins, a sales manager at Bay Equity, a Redfin-owned mortgage lender.
“You might have to meet additional requirements to secure these loans,” Channel warns.
For example, borrowers may need a higher credit score or a larger down payment to qualify. Additionally, interest rates for non-QM loans tend to exceed those of conventional loans because they don’t adhere to the Consumer Financial Protection Bureau’s qualified mortgage guidelines.
In the first half of 2024, the average 30-year interest rate for non-QM loans was 6.7%, compared to 6.4% for qualified loans, according to CoreLogic data.
A Temporary Solution for Unverified Income
Non-QM loans are particularly well-suited for real estate investors or affluent individuals with substantial assets, Channel explains.
“In these cases, you can often substitute assets for active income,” he says.
Even if you anticipate challenges with income verification, it’s wise to start with conventional loan options.
If your application is denied, ask the lender for clarification, Channel advises.
“Sometimes, the issue could be as simple as submitting the wrong year’s W-2 form. Errors happen,” he says.
For borrowers transitioning from traditional employment to self-employment or starting a new job, a non-QM loan might serve as a helpful “stepping stone,” Cohn suggests.
Once your income becomes verifiable through tax returns, refinancing into a conventional loan is always an option.
“Taking out a non-QM loan doesn’t mean you’re locked in forever,” Cohn reassures.
