Proving Income to Refinance Your Mortgage

Proving Income to Refinance or Purchase

One reason some home sales fall apart is the buyer can’t qualify for a mortgage loan due to the fact they have a hard time proving income.   One challenge for buyers and homeowners who want to refinance is they must prove to the lender they have enough income to afford the payments.

Meeting that standard isn’t always easy.  Banks give borrowers a preapproval in about 30 seconds, but to actually close the deal, they are nit-picking the heck out of them.  A lot can happen in 90, 120 or 180 days while waiting to close.  The borrowers situation for proving income could change.  The borrower could change jobs to do better opportunities or employer layoffs.

With that in mind, here’s a look at what it takes to income-qualify for a mortgage today, whether for a purchase or a refinance.

Taxable Income is the Only Kind That Counts

As a general rule, only taxable income can be counted when qualifying for a mortgage. This requirement trips up not only self-employed people but also employees who deduct unreimbursed employee business expenses on IRS Form 2106. Examples include business mileage, parking, travel, meals and entertainment costs.

For example, if you earn $60,000 a year, but you wrote off $5,000 in expenses, meaning you had to spend $5,000 to make $60,000, then your taxable income is only $55,000.

Nonsalary sources of income, such as a second job or sideline business, are acceptable if the income is consistent and reported on the borrower’s tax return. Generally this income must have been received for two years and will likely continue.  Social Security benefits, pension payouts, child support and the like can count, too, if the payments are regular and will continue.

Seasonal income typically must be annualized to smooth out highs and lows and show a true picture. Examples include landscape and construction workers whose hours are dictated by the weather and retail sales clerks whose schedules vary by holiday shopping patterns. Again lenders look for a 2 year earning history so don’t rush out to get a second job to try and qualify.

Lenders Look Backward and Forward

Lenders use a two-year look-back period when proving income of a borrower for a refinance or purchase mortgage. But that doesn’t necessarily mean the borrower must show two years’ worth of employment in the same job with the same employer.  Job changes do occur.  Lenders primarily are looking to see advancement in your career, not job hopping.

You don’t have to be at the job for two years, but you have to show that what you’re working at now is likely to continue and that the income is realistic.

Debt-to-Income Ratios are Conservative

Lenders use a debt-to-income ratio, or DTI, to figure out whether the borrower can afford the mortgage payment, even if it’s for a refinance with a lower payment. Years ago, borrowers could qualify with a DTI as high as 60% or even 65%. Nowadays, Miller says, most loans require a DTI of no more than 40%. FHA loans, insured by the Federal Housing Administration, are a bit more flexible.

Forget Stated-Income Loans

Since proving income is of critical importance, stated income loans are rare.  If you want to get the better rates and terms and be able to make the minimal down payment, you have to income-qualify.  Some States have even enacted laws that prevent any loans where the income is not verified in an attempt to prevent foreclosures.  This can be tricky for self employed borrowers who try and show little taxable income.

One exception is an FHA streamlined refinance loan, which requires a verified income source but not a documented amount or calculated DTI.

Banks Enforce Strict Guidelines

A strong credit score or hefty down payment relative to the property value might net some flexibility on the DTI but not much wiggle room in terms of income qualification.

That can be especially hard for homeowners who want to refinance to reduce the monthly payment but don’t have adequate income for today’s guidelines.  When you refinance, it possible that there will be a new investor that owns your loan.  That investor wants to make sure that they are not taking on someone else problem loan and they have a high probability of being paid back.