If you work as a freelancer or own a small business, you may not have the traditional pay stubs or tax return required to secure a mortgage. This lack of proper paperwork can make the difference between buying the home you want and being passed over for a loan. But, despite what may seem to be a disqualifying situation, you can still potentially get that mortgage.
Some home buyers are not employed or are paid in non-traditional ways which are largely undocumented. In such cases, special "no-documentation" loans are preferable. These loans forgo the traditional pay stub and tax return requirements and base your eligibility on credit ratings, liquid assets and assets that can be used as collateral in case of default. If a borrower shows a long history of paying her debts and she has the assets to secure the loan in case of failure to pay, some lenders will make the loan without proof of income or taxes. Such mortgages are doubly secured by both the applicant's holdings and the mortgaged property itself.
Stated Income Loans
Some smaller, independent lenders offer Stated Income Loans to applicants without traditional jobs or tax returns. These loans allow an applicant to state how much she makes in an average year without documentary proof. During the housing crash of 2008, these types of loans were often handed out to people without any further investigation by the lender. Today, in addition to stating your income, you must have excellent credit (720 or above) and liquid assets on hand that total all living expenses plus the cost of your mortgage for at least 6 months. A down payment of 30 percent or higher is also required. While it may seem like a lot to bring to the table, these loans can get you the house you want while protecting lenders from default.
Avoiding filing traditional taxes or showing your business or self-employment income on the last few tax returns may affect your mortgage eligibility. If you plan to buy a home in the near future, consider eliminating some or all of the deductions you normally take and putting down your total income. This method will cost more in taxes but will raise your stated income rate, making you more attractive to lenders. Filing in this manner for two consecutive years is typically enough to put you over the hump and gain you some traction in the home loan application process.
Co-Signers & Down Payments
In some cases, buyers who lack traditional documentation can secure a parent or relative who is in the position to co-sign the loan. This takes the pressure off and eases the mortgage application process. In other cases, unqualified buyers can secure the funds for a large down payment. Generally, lenders are more willing to make a loan when the buyer demonstrates that she is taking a substantial risk on the purchase by laying out cash up front. When the buyer has a lot to lose, the bank is less fearful of default. Obviously the larger your down payment, the smaller the loan and the more willing your lender will be to make the deal. 20 percent or more is a good place to start.
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