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A number of factors can cause your mortgage application to be rejected. One of them is the so-called “unverifiable income”.
Mortgage lenders want to know whether you have the financial ability to repay the loan. One way to do this, according to Freddie Mac, is to request documents such as your federal income tax return, W-2 and recent pay stubs.
Any money you earn that isn't tied to a form like a W-2 or 1099 can make it difficult for a lender to verify your annual income, said Jacob Channel, an economist at LendingTree.
For example, it can be difficult for a mortgage lender to verify the income you earn from a rental property you own, he said. The same goes for things like free cash for a down payment or side hustle.
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It's a more common problem than you might expect.
According to the National Association of Realtors' Profile of Homebuyers and Sellers 2024 report, about 12% of recent potential homebuyers were denied a mortgage because a lender couldn't verify their income.
The NAR surveyed 5,390 buyers who purchased a primary residence between July 2023 and June 2024.
In cases like this, where you have different forms of income or are self-employed, it may be worth looking into unconventional mortgage options, said Melissa Cohn, regional vice president of William Raveis Mortgage in New York.
“The good news is that there are programs for people who don’t qualify through traditional means,” she said. “But it’s a little more expensive.”
For example, you may have to comply with higher mortgage rates than usual.
Here's what you need to know:
This is how a non-qualified mortgage works
Some homebuyers who need more flexibility when applying for a mortgage may benefit from a non-qualified mortgage or non-QM loan, Cohn said.
With such loans, income is checked differently. If you're self-employed, a non-QM lender may use a pay stub, tax return or W-2 statement to calculate income that may qualify for the loan, she said.
“They might also look at what type of assets you have,” Channel said.
Other banks and lenders accept the most current 1099s and do not rely on tax returns if you are self-employed in a business you own, Cohn said.
But be careful. While it may be easier to qualify based on income, such loans could be more expensive, said Brian Nevins, director of sales at Bay Equity, a mortgage lender owned by Redfin.
“You may have to jump through more hoops to get these mortgages,” Channel said.
For example, you may need a higher credit score or need to make a larger down payment.
The interest rate on the loan may also be higher than a conventional loan. That's because non-QM loans don't meet the criteria for qualified mortgages set by the Consumer Financial Protection Bureau.
In the first half of 2024, the average initial 30-year interest rate for non-QM loans was 6.7%, compared to 6.4% for a qualified loan, according to CoreLogic data.
A “springboard” for untested income
Non-QM loans are often better suited for those investing in real estate or wealthy individuals with multiple assets, Channel said.
“In cases like that, you can kind of replace active income with assets,” he said.
Even if you are concerned that your income will be difficult to verify, it is advisable to start with traditional loan options.
“If your application for a conventional mortgage is rejected, contact your lender and ask the reasons for the rejection,” he explained.
“Maybe you filed the wrong year’s W-2 form. Mistakes definitely happen,” Channel said.
But if you're going through a transition from employment to self-employment or starting a new job at a new company, a non-QM loan could be a “stepping stone,” Cohn said.
Once you have sufficient returns from your returns, you can apply for refinancing at any time in the future, experts say.
“Just because you take out a non-QM loan doesn’t mean you can’t move forward,” Cohn said.