When seeking traditional agency/conforming or government-backed mortgage financing, a lender must verify your income using conventional methods, meaning the borrower must supply specific standard documentation to evidence their current income and earnings history. Required income documentation generally includes paystubs, W2s, and tax returns. While conforming (Fannie Mae or Freddie Mac), FHA or VA loans are the best options for a majority of home buyers, many others do not receive regular paystubs and W2s or may have tax returns that reflect substantial expenses, write-offs, and write-downs. For home buyers who want or need to provide different documentation of their income, Harborside Home Loans has a variety of solutions that you likely won’t find at a bank.
Who Should Consider Applying for an Alt Doc Loan?
Many people have income that cannot be verified through standard income documents. Many business owners operating a highly successful business have complex tax returns, show income that fluctuates, or show write-downs, expenses, and deductions; some independent contractors, 1099 earners, have similar tax returns and don’t receive standard paystubs. Just because you do not have paystubs to provide doesn’t mean you cannot buy a house—we now have bank statement loans, 1099 loans, and DSCR loans.
Since lenders underwriting loans with alternate documentation do not go through a rigorous verification process to determine your income and repayment capacity, they often require a slightly higher downpayment and will look closely at the borrower’s credit score, especially at the borrower’s mortgage payment history; credit must reflect on-time mortgage payments every month. Since the lender is allowing alternative documentation to verify income, their decision to approve a loan will be based substantially on verifying that you pay your current home loan on time each and every month and that you have no other accounts that are currently past due or delinquent.
Conventional Bank Home Loans vs. Alternative Documentation Loans
Bank Statement Loans for Business Owners – In lieu of two years of tax returns to qualify for a home loan from a bank, you would provide either 12 or 24 months’ worth of bank statements. Some options allow a borrower to provide personal or business statements, and others allow you to submit 12- or 24-month statements. Typically, a borrower that provides 24 months of statements will get an eighth- or one-quarter-point reduction in their interest rate. There is no rate difference for providing business statements versus personal. It is important to note that underwriters are only permitted to count deposits from one bank account to calculate income – so if your business deposits revenue into several different accounts, you must select one bank account to be used for income calculation. With a bank statement loan, income is calculated solely on deposits. Withdraws and expenses are not accounted for in the calculation. Thus, these loans work extremely well for those who own and operate a business that has considerable revenue coming in but sizeable expenses going out. While underwriters will ignore the withdrawals when totaling income from bank statements, they will be looking for consistency in deposits—they need to see that the frequency and amount of deposits are relatively stable month to month. For example, if a borrower’s business brings in revenue/deposits of roughly $100,000/month and total deposits for 12 months are $1.2 million, that income will likely be acceptable. Whereas if the borrower’s business made $100,000 in total deposits during the first eleven months of the year, and then $1.1 million in month 12, that business income will be scrutinized much further even though both businesses totaled the same amount for the year.
1099 Loans for Independent Contractors – Just like business owners, 1099 Independent Contractors generally don’t receive standard paychecks and may have two-year tax returns that show fluctuations in income, or reflect substantial write-offs/expenses or write-downs. 1099 loans function similarly to bank statement loans. A borrower will typically supply 2 years of 1099, but will not need to supply tax returns. The lender will then calculate the borrower’s income based on the income reflected solely on the 1099s minus an assumed or estimated expense ratio (typically 50%, but may be higher or lower depending on the business/profession; or if the borrower’s CPA provides a letter stating an expense ratio other than 50%).
Who Should Consider Getting an Alternative Documentation Loan?
Business owners with:
- Complex and voluminous tax returns, or
- Tax returns that reflect significant expenses/write-offs or write-downs, or
- Tax Returns that reflect fluctuations in income, or
- If your business income has increased substantially in the past 12 months, the prior 2 years of tax returns don’t accurately reflect your current earnings.
What Should You Remember while Considering Alternative Documentation Loan?
It would be best if you were clear about alternative documentation loans before you applied for them or considered them a viable source of financing.
Alternative documentation loans are not similar to no-documentation loans. You will still need to provide some documentation to show your current source of income and your assets. You will just not need some documentation, like tax returns, that you would have had to submit to a bank in case you applied for a regular loan.
It is not mandatory to opt for alt-doc loans just because you are self-employed. If you can show the relevant documents needed for a regular home loan, you can go for it.
In addition, keep in mind that borrowers that you will pay a slightly higher rate of interest for loans with alternative documentation. Since this form of loan does not have rigorous verifications and income-proof requirements, lenders mitigate the risk by charging higher interest rates.
You must opt for a licensed lender to apply for an alt-doc loan. Do your research thoroughly because you won’t have the security of a bank approving your loan. Ideally, you approach professionals who have experience in this field and will be able to offer you guidance about the documents you may or may not require for an alt-doc loan.
At Harborside Home Loans, we specialize in providing our clients with the best advice on home financing.
Our mortgage professionals have worked in the industry for years. We offer tailor-made solutions for our clients looking to purchase a property. Whether you are a first-time home buyer, want to refinance your home, or seek personalized mortgage consultation. We have got you covered.
Call us today for a quick consult, and you will be on your way to finding new solutions to buy your dream property.