Applying for a home loan? Omitting, hiding, manipulating or not showing income, may be a gray area with your mortgage company. What to know…
When you apply for a home loan, there are specific income documentation requirements, all lenders will require to fund on a mortgage . This includes:
- Two most recent years income tax returns with accompanying years W-2’s
- Two most recent years corporate returns if self-employed
- 30 day pay stub history
*One caveat to this rule is when completing a government loan streamline refinance or Harp 2 Refinance, no income documentation may be required.
Where Things Get Sticky
The self-employed borrower-there is no getting around the two-year lending requirement for the need to show two years tax returns including the corporate returns, if applicable. The federal lending requirements in place today prevent a lender from cherry picking which income years to use for qualifying. That’s right for example if you’re 2013 income year was strong, but, 2012’s income year was very low, the lender cannot simply just ignore the 2012 income as they must take in consideration a 24 month average of your income when qualifying. In this capacity the lower income will adversely affect the higher income by virtue of the averaging. A workaround, is to generate double the income in the next taxable year, thereby offsetting the lower year’s return.
If you are an employee of your own company, once again, neither you nor your lender just arbitrarily not provide tax returns, and request use of your W-2s and pay stubs as the only supporting form of income documentation. Even if you are an employee of the corporate entity you own, you’re still considered self-employed. Why? You control and set your own income unlike a traditional employee that does not have an ownership interest in the company.
Non-disclosed income -the first question a prudent lender would want to understand this why are you trying to hide your income? Most of the time when the situation arises, it is because showing full income will make the lending scenario worse in trying to qualify. If you are receiving income you are not paying taxes on and it’s not identified or disclosed on your tax return and your otherwise obligated to pay taxes on that income, you have bigger problems. IRS pays particularly close attention tax cheats. Simply put, give the lender you’re working with all material information regarding your income. Doing so allows them to help aid you in procuring mortgage financing.
Side Jobs -this is not something you can hide from your mortgage lender. This could cause a rifle in your mortgage loan application if you’re putting cash deposits independent of your normal income in your bank account your supplying in conjunction with your application. Lenders must source and document cash deposits 20% of your monthly income or more on conventional loan financing. Applying for government financing? All deposits must be documented and sourced, meaning you’ll need to explain and provide the origin of were the funds came from. While this may not count as income, it will be a nuance you may have to deal with if depositing cash.
Loan applicant vs another- whichever borrower has a stronger chance of qualifying is usually the one most suited for the lender to review for loan approval. If looking at a conventional mortgage loan, one borrower’s credit, debt, income and asset history could be used rather than the other if the other person’s financial information is not as strong as the anchor borrower, allowing their income to be omitted. Things would change when looking at a government loan such as an FHA, VA or USDA type where the debt of the spouse negatively impacts the primary borrower, whose income can’t be used on the loan if their credit score is not high enough, in that situation, that income is ignored, but the debt is not.
USDA Quirk- total household income is reviewed with the tax returns on this loan type. Unlike a Conventional or an FHA type, where you can cherry pick what borrowers on the loan application, the USDA reviews total household income. For example if one borrower generates $70,000 in annual income, and the spouse not on the loan generates another $40,000 in income the total household income is $110,000- exceeding USDA’s income threshold (varies per county), meaning the lender must count the other $40,000 income, whether this person is on the application or not.
Ultimately, lenders do want to make loans to borrowers who can fully support their ability to make a mortgage payment. This is mainly accomplished using the discussed supporting documentation to generate the income used to determine what percentage of the income will go towards all debts. Expect most mortgage companies to want your mortgage payment + other liabilities to be 55% of your income or more.
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