In a previous article, we discussed the various strategies we can use to establish your income. We feel this is an important topic, and we’d like to revisit the subject by discussing the different people who may benefit from these strategies.
When the majority of people start searching for a new home (assuming a mortgage is needed), they know they need to prove their income, but they aren’t overly concerned with the process.
Most homebuyers and mortgage borrowers can simply use their paystubs and tax returns, the two common sources of information that lenders use to establish your income. Paystubs give lenders a clear picture of how much you earn on a regular basis, demonstrating your income usually on a weekly or bi-weekly basis. Tax returns are just as reliable for most people, as they show incomes on a year-to-year basis.
But what if you are in a situation where these documents won’t work? Perhaps you work in a commission-based career, where the majority of your income is dictated by overall performance, such as sales. Paystubs are rarely reliable in this case.
What about tax returns? If you are a self-employed business owner, tax return can be inconsistent, as you may have multiple write-offs that change your final numbers.
And some people may not earn a traditional income. Retirees, disabled individuals, and investors all have more trouble establishing an income than most people.
To further understand the issue, we’ll start by briefly reexamine the strategy, then give you some examples of people who may benefit from this technique…
Who Benefits from the Different Ways to Establish Incomes?
1. A Single Year of Tax Returns
Tax returns can be a tough document to use for many different lenders. In some cases, inconsistencies from one year to another make tax returns a complex source of information when looking for a mortgage loan. With this in mind, we can actually use one year of tax return documents to establish your income.
Using a single year of tax information helps to streamline the process. You’ll only need to generate a single year of documents, and the lending agent can work quickly to review the information and deliver the pre-approval you need to start shopping for a home.
Who Benefits from This Strategy?
Generally, this is a good strategy for people who have inconsistencies from one year to another. For example, if your most recent tax return shows a significant boost in income, it may be best to use only that year’s documents.
2. IRA Distributions without a History of Receipt
Anyone over 59.5 years of age can use future income to qualify for their mortgage loan. This process uses IRA distributions that will be administered in the future, giving you the chance to use income that you are not earning now, but will soon. There is a mathematical formula that your lending agent will use to estimate your future income, and this will be factored when calculating how much money you can borrow towards your home purchase.
In many cases, this will make certain homes, especially higher-priced homes, more accessible to borrowers, as their qualifying income could be increased. If you have any IRA accounts, talk with your lending agent about using these assets as a way to establish your income.
Who Benefits from This Strategy?
If you have retirement accounts, specifically an IRA, that you have not yet withdrawn from, and you are over the age of 59.5, this is a good strategy for you.
3. Asset Depletion and Retirement Income
With this technique, we essentially add all of your assets and divide the sum by a set number of months, allowing us to estimate the amount you can spend on your mortgage while maintaining a decent nest egg. Essentially, borrowers who use this strategy do not need to show a source of income or even employment, and instead rely on a combination of savings, retirement accounts, properties, and other assets. This is commonly used for people who are older than 59.5 years of age, and with the right lender it could be your ticket to a wonderful home.
Who Benefits from This Strategy?
This is a good strategy for people with no (or little) typical income hundreds of thousands or millions of dollars in various non-liquid assets.
4. Ordinary Income with No Distribution
If you want to increase your qualifying income, it may be possible to use ordinary income with no distribution. This is another way that you could increase the total amount of borrowing power available, and it could make certain home an option that would otherwise be off limits.
Who Benefits from This Strategy?
Anyone who has an ordinary income but has not yet had a distribution from certain accounts will benefit from this strategy.
5. Real Estate Equity
As part of your income, we can actually use a total of your property equity and factor that amount into your total income. By using the equity in your home, you are taking advantage of the savings you have generated through mortgage payments; savings that is locked up in the property.
Who Benefits from This Strategy?
People who own a variety of real estate properties, including personal-use properties and investment properties, should consider using equity towards their next purchase.
6. Bank Statements
As we discussed above, paystubs and tax returns are often insufficient for establishing an income. For this reason, many borrowers will simply use their bank statements. Not all lending agents can work with this information, but using statements from bank accounts is often the most accurate way to establish an income, as it shows details about deposits, withdrawals, and total balances.
One of the top advantages is that lending agents can see exactly how much you have in savings and checking accounts, which tells them (assuming the number is strong) that you are a reliable borrower who can handle the new debt load.
Who Benefits from This Strategy?
This is a popular way to establish income for people who are either self-employed or work in a commission-based career, such as sales.
Let Us Establish Your Income with these Useful Strategies
If you have a unique income source and have found difficulty getting approved for a loan, let us help. We have the experience and knowledge to help you get approved for a top-quality mortgage loan.
Contact our staff today to learn more about our common-sense approach to mortgage underwriting!
