If you ask someone how much money they make in a week (which, we admit, would be extremely rude!) most could give you a specific number.
But many people would say, “that depends on the week.”
Self-employed and commission-based sales people are two examples of workers with inconsistent incomes. They may earn a lot of money, but the income doesn’t flow at a consistent basis. They may have a flash flood of money in October, then see a trickling income in November.
But what does this mean when getting a mortgage loan? Unfortunately, most loans are based, at least in part, on your regular paycheck. If you can prove that you earn exactly $1,500 a week, for example, the lender can use this information to help you get approved. However, if you deposit $2,800 one week and $200 the next, it can be difficult to get approved.
But it’s not impossible…
How to Get a Mortgage With an Inconsistent Income
To get approved for a mortgage loan without a consistent income, you simply need to prepare your finances, organize your documents, and maintain responsibility with your budget. Follow these tips, and you can get a mortgage without a consistent income.
Self-Employed Borrowers Will Likely Need Two Years’ Experience
On the subject of business owners and self-employed individuals, you will likely find that the lender requires you to have at least two years of sustained experience in the business to start the mortgage process. If you have two years experience you are, statistically speaking, more likely to make it in the long term. Two years is seen as a threshold, and if you can reach this mark (or already have) you’ll be more likely to be approved. This two-year mark is maintained by Fannie Mae and other institutions.
Talk to Your Lender about a Bank-Statement Mortgage
A bank-statement loan is essentially a mortgage that uses bank statements to create qualification. These loans can be extremely effective for people who want a large loan above the standards set by most government lenders, or need to qualify using an inconsistent income. Some people are unable to verify their income using traditional means, so a bank statement, which shows deposits, withdrawals, and balance amounts, will help lenders see when and how you get paid, as well as how much.
Save for a Large Down Payment
The more of a down payment you can bring, the better your chances for being approved for a mortgage loan if you have an inconsistent income. Lenders like to see a large down payment for many reasons. First, it demonstrates your ability to save and maintain responsible financial habits. After all, if you are responsible enough to save a down payment, you are probably responsible enough to make the mortgage payments. A down payment also reduces your loan-to-value ratio, which is an important factor for lenders.
Protect Your Credit Score
For all borrowers, the credit score is a crucial part of loan approval, but for people who do not have a consistent income, it’s absolutely critical. Be sure to maintain a strong credit profile by making timely payments, keeping your debt load in check, and monitoring your credit for inaccuracies. With diligence and responsible spending, you can improve your credit score and keep it at a level that makes you more appealing to lenders.
Bring as Much Financial Information as Possible
While typical employees have a clear-cut path to proving their income, you’ll have to do a little more work to do. Take the time to educate your lender on your business’ profits, expenses, and revenues and you will increase your chances of approval. In a nutshell, lenders like information, so if you can give them financial records of your business, it will certainly help.
You may also want to educate your lender on the nature of your business. If you have a unique business, help them understand what you do, how you do it, and how you make money. This information will increase their confidence in your ability to repay the loan.
Improve Your DTI
The debt-to-income ratio is one of the most important factors for lenders, and one of the most consistent predictors for lending risk. This ratio (which is actually written as a percentage) tells lenders how much you owe in monthly payments compared to how much you earn. For example, if you earn $4,000 a month and have $1,000 in payments, your DTI is 25%. ($1,000 is 25% of $4,000.) The higher the percentage, the more risk there is to lenders.
If possible, reduce your DTI by eliminating debt and keeping your credit balances as low as possible. Paying off credit cards, car loans, and student loans (if possible) will greatly reduce your DTI and make you more appealing to lenders, despite the fact that you own a business or earn commissions.
Use All Your Income Sources, Not Just Your Job or Business
Many people forget that income doesn’t just come from a 9-5 job. There are many source of income that you may be able to use for qualification, including investment income. To use investment income, you’ll likely need to demonstrate past payments and provide documents that verify the source. You could also use retirement income, such as Social Security and pensions, or secondary income, such as part-time work and side businesses, to increase your chances of approval.
Get a Letter from Your Employer
Finally, if you work on commission, you should get a letter from your employer that states the nature of your work. An employment letter will help a lender understand your career and income, and while they can be useful for typical salary or wage employees, they can also be helpful for commission-based employment. The letter should include your base salary, nature of employment, and income for at least the past year.
Common-Sense Lending for People Who Don’t Have a Consistent Income
If you earn an income, you deserve the best shot at a mortgage loan! Contact the team at San Diego Purchase Loans and we’ll help you find the right loan for your specific needs. Let us use our common-sense approach to lending to increase your chances of approval!
