Today, a no income verification loan differs from what it used to be before the housing crisis. Rewinding to 8 to 10 years ago, a no income verification loan meant that you did not have to provide anything but great credit to a bank in order to obtain a loan. After the housing crisis and the overabundance of foreclosures on the market, those loans became a thing of the past. Today, they are slowly making a comeback, but they are much different than ever before.
What does No Income Verification Mean?
Today, no income verification means that you are more than likely self-employed and cannot easily verify your income. If your tax returns show a much lower income than you make today, you might be eligible for this type of loan, assuming you have excellent credit. Lenders need some type of reassurance that you are a low risk – they cannot just hand out a loan without full verification of your income without knowing that you are financially responsible. Today, no verification of your income means that you either do not provide your tax returns, but rather provide asset statements and excellent credit. In some cases, however, it could mean that the lender asks for access to your tax transcripts via an executed IRS Form 4506.
What Type of Equity Must you Have?
The best way to get approved for a no income verification loan is to have a large amount of equity in the property. This can mean one of two things:
- If you are purchasing a property, you need to be able to put a large amount of money down on the home. This means more than 20 percent, which is the standard requirement; it means closer to 40 percent if you want a bank to take you seriously.
- If you own the property and need to refinance, you need to have at least 40 percent equity in the home in order to qualify in most cases.
Employment still Verified
What no income verification loans does not mean is that the lender will not verify your employment. You must be employed or self-employed and be able to verify it. If you are employed, you must work on commission or mostly bonuses if you want to use the no income verification loan. Otherwise, it would be like lying on your application if you do not want the lender verifying your income. On the other hand, if you work on commission or bonus, your tax returns could report a much lower amount of income than you actually make because of the number of expenses and other write-offs you take advantage of in order to lower your tax liability. In this case, the lender can verify your employment, rather than your income.
If you are self-employed, the lender can still verify your employment. This can be done in one of two ways:
- Provide your license to operate the business – If your business requires any type of specific licensing, you can provide it to the lender for proof of your business. Typically, the lender will require a little more verification as well, such as receipt of income from the company in your bank account or even bank statements from the company in your name.
- Provide a letter from your CPA – The best way to verify your self-employment is by providing a letter from your CPA on his letterhead. The CPA must state that he handles your finances for the business and that you are in fact, in business for yourself.
Compensating Factors are Important
One of the most important things you can do for yourself when you try to obtain a no income verification loan is to have compensating factors. The given requirements include excellent credit and adequate equity in the property. Beyond that, however, you can provide the lender with other reasons to take a chance on you. These compensating factors can include any of the following:
- A housing history with no late payments in the past few years. This shows your financial responsibility towards your housing liabilities.
- No collections or judgments on your credit report to further your ability to show your financial responsibility.
- Reserves on hand in your checking or savings account that equal 6 to 12 months’ worth of mortgage payments also show financial responsibility.
- Long-term employment that you can verify. The longer you have been at the same employer, the less risk you pose to the lender.
The bottom line is that you have to look at the entire picture when it comes to applying for a no income verification loan. You cannot expect that just because you have good credit that you will get approved. The lender will need to see an entire financial picture that shows responsibility and very little risk. The best way to do this is to borrow as little as possible, which means saving up in order to have a large down payment or waiting until you have extensive equity in the home that you own before you refinance. In addition, the more stability you can show with your employment, whether you work for someone or yourself, can further your likelihood of getting approved. The more compensating factors you have to make up for the fact that you cannot fully verify your income, the better. In some cases, borrowers can replace their standard income documents with asset statements, showing receipt of the income, while other times, even that is not possible.
Whatever the case may be for you – embrace what you have and showcase the positives to a lender. The more you work on your credit and your savings, the better time you will have with any lender. The good news is, however, that there are plenty of lenders out there that are handing out no income verification loans today – you just have to be able to appeal to what they are looking to fill. If one lender turns you down, do not give up – keep shopping until you find a lender that your attributes meet.