How can I prove my undocumented income? - Lenders have had to adapt with the changing work landscape in America. More borrowers than ever are self-employed or drive their income from unconventional sources. Lenders realizing this have come up with many alternate income documentation programs for borrowers with undocumentable income.
Many lenders now offer bank statement income programs. With these programs you will use either 6, 12, or 24 months worth of the most recent consecutive bank statements and add up the deposits and then divide by the total number of months of statements. This will provide you with an average monthly income or money coming into your account. Many banks will use this as your income and some may only allow you to use a percentage of the deposits, such as 75%.
A no documentation program allows allows you to get a mortgage while providing literally no proof of your employment, income, or assets. This type of program is perfect for someone who has possibly retired and has substancial assets, but is receiving minimal or no income. Since the lender is not collecting any information about you other than your credit history, you will pay a slightly higher interest rate than a typical full documentation loan.
In addition to bank statements or a no documentation program, lenders also offer stated income loans. In a stated income loan, your employment is verified, but your income is not. Like no documentation programs, stated income loans come with a slightly higher interest rate.
Low Documentation Mortgage - Low Doc loans are loans that require less income documentations. There are basically three types of Low-Doc mortgages, Stated Income loans, bank statements as incomes, and No Ratio loans.
Stated Income mortgages require the loan applicant to disclose his income on the loan application, but do not require any income documentations, such as paystubs and W2’s, to support his "stated" income. However, the lender banks will verify the place and length of the applicant’s employment with the employer.
No ratio loans were designed mainly for people with outstanding credit who have a hard time proving their income. You will list your employer on the 1003, or loan application, how long you worked there, the employers address and phone number, and your position but you will not list anywhere on the application how much your actual income is. There is a rate increase associated with this loan due to the obvious risk a lender is taking on by not verifying how much money a person makes. The lender will verify your employment though by contacting your employer and verifying your position, how long you have been there and what your probability of continued employment there is. If the lender is unable to verify your employment they may not approve the loan or allow you to close until they can verify the employment.
For a contract person who has moved to a new location might be best suited for No Ratio program. The stated income program might not work for this type of situation because the underwrite might ask and deny the loan if the underwrite decides that it is unreasonable to make the noted income when the borrower's business is based on referral and he/she has just moved to a new location
Another type of Low Doc mortgage is the "bank statements" loan. Some banks only require 6 months bank statements of the loan applicant's personal account to estimate income. In "bank statements" mortgage, the average deposits over the past 6 months are deemed as regular income. Large, extraordinary deposits are usually excluded in the calculation of income.
Low documentation loans are great for people that are receiving income that is not documented such as tips. Business owners and contractors also do not report the majority of their income on their tax returns for tax purposes. In both instances it appears that the borrower is not making as much money as they truly are. The use of limited or low documentation will help these people qualify for loans.
Often times a Verification of Employment (VOE) for employment and income requirements, and a Verification of Deposit (VOD) for asset requirements can be a more stream-line, less paperwork-heavy documentation type. In the same regards, a Verification of Rent (VOR) can also replace the need for stacks of cancelled rent checks.