Alternative Income Sources For A Loan Qualification; Saves Many Deals!

From about 2008 – 2011, 95% of the loans we funded relied solely on tax returns, W2s, and paystubs for verifiable income.

If borrowers could not verify enough income, hard money (requiring no income and only equity) was often their only alternative – but hard money, of course, comes with high rates, high fees, and large down payment requirements (in excess of 30% usually).

Slowly but surely though, new loan products started to filter back into the market that did not require traditional income verification.

These alternative income loans are now prominent, saving numerous transactions and enormous amounts of money for buyers.

Below is a list of some of the alternative income sources.

Agents should peruse the list so they know not to give up on potential clients who might otherwise believe they cannot qualify for a loan.

1. IRA Distributions: This is an option that is available far more often than people realize. Retirement-age borrowers can simply set up withdrawals from their IRAs and use those amounts as income as long as the draw schedules are 36 months or longer after close.
2. Asset-Based Loans: There are many variants of these loans now, but most of them simply amortize liquid assets over time and consider the amortization schedule to be income. One option, for example, takes all liquid assets available after close (after the down payment and closing costs are subtracted) and divides that amount by 60 to come up with income.
3. Bank Statement Deposits: This option allows self-employed borrowers to use regular bank deposits on their bank statements as income. The deposits can be averaged over 12 or 24 months – and no, this can’t be “gamed” by making unusually large deposits from borrowed funds or non-business activities (these deposits will have to be explained).
4. Rent: Debt Service Coverage Ratio (DSCR) loans allow buyers to finance the purchase of investment properties, using only rental income to qualify. If the monthly rent exceeds the housing payment, the rates are very competitive too (close to Fannie Mae’s rates). But, even if the rent does not cover the housing payment, borrowers can still use the rental income alone to qualify for a loan that is much more competitive than hard money alternatives.
5. A Pulse: A pulse and decent credit (and a few assets) are all that are needed for today’s “no-ratio” loans, which require no income verification at all. These loans have higher rates and require at least 20% down, but they still remain much better than hard money alternatives, as the rates and down payment requirements are lower. NOTE: These are not the return of pre-2008 “subprime” loans, as these loans require more assets, better credit and far larger down payments (“no-ratio” sub-prime loans often required no down payment at all – a recipe for disaster every time).
6. The Ol’ W2 Switcheroo: We have a borrower right now who works for his father-in-law as a 1099 contractor – and his debt ratios are very tight. As a result, we might ask him to ask his father-in-law to switch him to W2 so we can use the full amount of his income as opposed to his “Schedule C” income on his tax returns (which shows a lot less income because of all the deductions he took advantage of). Switching borrowers to W2 is something lenders do surprisingly often when 1099 (self-employed) borrowers have strong relationships with their primary sources of income.