A Guide to Mortgage Qualification With Uneven Income

The ZeroDown team has underwritten all income types for ZeroDown financing, as well as for mortgages, and here is our latest advice:

Our guide to mortgage qualification with uneven income:

Uneven income is a concern for mortgage lenders

Lenders are looking for a predictable source of income to verify that one can afford the monthly payments on the loan. Traditionally, the income on a W-2 showing the same job and same or increasing earnings for the past 2 years meets this definition. Lenders will use this, as well as an up-to-date verification of your employment status from your employer, to project that your income will continue at similar levels in the future. They will compare this income to your expected loan payments and other expenses to determine if you can afford them or need a smaller loan. The reason uneven income is such a widespread concern for lenders is the consumer protection provisions of the Dodd-Frank Act only apply to qualified mortgages, and qualified mortgages have strict income verification requirements that won’t work for many folks with uneven income. The Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule) requires a creditor to make a reasonable, good faith determination of a consumer's ability to repay a residential mortgage loan according to its terms.

Some lenders can still grant loans to borrowers with uneven income

If you are not a W-2 employee, meaning you are self-employed, a gig worker, contract worker, freelancer, self-employed, or entrepreneur, then you won’t have a W-2 or verification of employment from your employer. Instead, you will need other documentation, the most common of which are 1099 forms, tax returns, and bank statements. If you are a small business owner, you may also need to show historical and projected financial statements from your business certified by your accountant. One issue with using tax returns is you may have non-cash expenses or non-recurring expenses that significantly lower your taxable income. The good news is this lowers your tax bill; but the bad news is it can reduce your borrowing eligibility. Your 1099 statement showing your gross income might be a better indicator of your recurring income, and you should discuss your desire to use this form to document your income with your lender.

How do lenders measure uneven income?

You will typically need to provide a minimum of 2 years of historical income documentation to the lender. In some cases, as little as 1 year may be acceptable. If income has increased year over year, the lender typically averages the 2 years together to measure your income. If your income declined year over year, the lender typically takes the lower, more recent number. 

Down payment requirements, minimum credit scores and interest rates might be different for consumers with uneven income

It is a fact that there are less funding sources for borrowers with uneven income, and these lenders can therefore dictate stricter requirements to make these types of loans. For consumers with perfect credit willing to make large down payments, your interest rate could be the same as a borrower with traditional w-2 income. However, in other cases where your credit is less than perfect or you want to make a lower down payment, you may have to be prepared to pay a slightly higher interest rate than a comparable borrower with traditional income. 

Non-conforming mortgages are 12.0% of U.S. mortgage loan volume

Mortgage Qualification With Uneven Income graph
Source: Black Knight

READ NEXT: Credit Scores: How They Can Affect Your Mortgage Rate

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