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‘Unverifiable income’ can limit your mortgage options — here’s how to get around it

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A number of factors can get your mortgage application denied. So-called “unverifiable income” is one of them. 

Mortgage lenders want to know if you’re financially capable of paying back the loan. One way they’ll do that is by requesting documents like your federal income tax returns, W-2 and current pay stubs, according to Freddie Mac. 

Any money that you earn that isn’t tied to a form like a W-2 or 1099 can make it difficult for a lender to verify your annual income, said Jacob Channel, an economist at LendingTree. 

For instance, income you earn from a rental property you own may be tricky for a mortgage lender to verify, he said. The same can be said for things like gifted cash for a down payment or side hustle earnings.

It’s a more common problem than you might expect.

About 12% of recent prospective homebuyers were denied a mortgage because a lender could not verify their income, according to the 2024 Profile of Homebuyers and Sellers report by the National Association of Realtors.

The NAR polled 5,390 buyers who purchased a primary residence between July 2023 and June 2024.

In such instances where you have different forms of income or are self-employed, it may be worth looking into non-conventional mortgage options, said Melissa Cohn, regional vice president of William Raveis Mortgage in New York. 

“The good news is that there are programs available for people who don’t qualify conventionally,” she said. “But it is a little bit more expensive.”

For example, you may have to sustain higher-than-usual mortgage rates.

Here’s what you need to know.

How a non-qualified mortgage works

Some homebuyers who need more flexibility when applying for mortgages could benefit from a non-qualified mortgage, or a Non-QM loan, Cohn said.

Such loans verify income differently. If you’re self-employed, a non-QM lender can use bank statements to calculate the income that may qualify for the loan instead of a pay stub, tax return or W-2, she said.

“They might also look at what kind of assets you have,” Channel said.

Other banks and lenders will accept the most recent 1099 and do not rely upon tax returns if you’re self-employed in a business you own, Cohn said.

But, be careful. While it may be easier to qualify through income, such loans can be more costly, said Brian Nevins, a sales manager at Bay Equity, a Redfin-owned mortgage lender. 

“You may have to jump through more hoops in order to get those mortgages,” Channel said.

For example, you may need a higher credit score or be required to provide a bigger down payment.

The loan may also come with a rate higher than that of a conventional loan. That’s because non-QM loans do not follow the criteria of qualified mortgages set by the Consumer Financial Protection Bureau.

In the first half of 2024, the average initial 30-year interest rate for non-QM loans was 6.7%, compared to 6.4% for a qualified loan, according to data from CoreLogic.

A ‘stepping stone’ for unverified income

Non-QM loans are often better suited for those who invest in real estate or wealthy individuals with a number of assets, Channel said.

“In those instances, you can kind of substitute assets for active income,” he said.

Even if you suspect your income will be hard to verify, it’s smart to start with traditional loan options.

If your application for a conventional mortgage is rejected, reach out to your lender and ask why it was denied, he explained.

“Maybe you submitted the wrong year’s W-2 form. Mistakes do happen,” Channel said.

But if you’re going through a transition from being employed to self-employed, or starting a new job with a new company, a non-QM loan could be a “stepping stone,” Cohn said.

Once you start to show sufficient income on your returns, you can always apply for a refinance in the future, experts say.

“Just because you take out a non-QM loan doesn’t mean you’re stuck,” Cohn said.

Read more on CNBC

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Should you refinance your mortgage? Here are three signs it’s time, real estate experts say

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It’s unclear when the Federal Reserve could begin cutting interest rates, but many homeowners who took out a mortgage in recent years — as rates hovered between 6% and 7%, and even touched 8% — are paying attention for opportunities to refinance.

Thanks to those high mortgage interest rates, refinance activity in 2023 was at the lowest level in 30 years.

In the first and second quarters of 2023 there was only $75 billion and $80 billion, respectively, in mortgage refinance originations nationally, according to Freddie Mac, a government-sponsored entity that buys mortgages from banks.

“Because rates shot up so much over the past few years, refinancing activity has mostly disappeared,” said Jeff Ostrowski, a housing analyst at Bankrate.

Refinancing activity rose 2.9% in February compared with last year, Freddie Mac found. However, fewer owners might refinance their loans as they might still be locked in on historically low rates or may see little incentive to do so, the mortgage buyer forecasts.

As homeowners wait to see when Fed rate cuts might materialize, and to what extent, here are three signs it may be smart to refinance:

1. You can cut your rate by 50 basis points or more

The right time to refinance your loan depends on when you bought your house, said Chen Zhao, a senior economist at Redfin, a real estate brokerage site.

It’s typically smart to wait for rates to go down by a full percentage point because it makes a significant difference in your mortgage, experts say.

Yet, once you start seeing rates decline by at least 50 basis points from your current rate, contact your lenders or loan officers and see if it makes sense to refinance, depending on factors including the costs, monthly savings and how long you plan to be in the home, Zhao said.

“There are costs associated with it, but the costs are low in comparison to the savings over the long term,” said Zhao.

 
 

While the outlook on Fed rate cuts continues to change, rates are unlikely to go much below 6% in the near term, Zhao said.

“We’re just in a much higher interest rate situation with the economy,” she said.

Don’t hold out for a super low rate like the ones consumers saw in the early stages of the Covid-19 pandemic.

“We’ve been so accustomed to mortgage rates as a baseline being at 2% or 3%,” said Veronica Fuentes, a certified financial planner at Northwestern Mutual. “That’s what we expect the norm to be, but that’s actually not the case.”

2. You can pay cash for closing costs

When you refinance, “it’s like doing a brand new loan all over again,” Ostrowski said.

That means you’ll incur closing costs, typically including an appraisal and title insurance.

The total cost will depend on your area or state.

The average closing cost for a refinanced single-family mortgage was $2,375 in 2021, up 3.8%, or $88, from $2,287 a year prior, according to CoreLogic’s ClosingCorp, a provider of residential real estate closing cost data.
Refinancing can make more financial sense if you are able to pay those upfront instead of rolling the expense into your new loan. Some lenders may require a higher interest rate if you finance closing costs, plus you’ll be paying interest on those expenses for the life of the mortgage.

“You have to be pretty mindful and have a good strategy for how much money you’re going to save and whether it makes sense,” Ostrowski said.

3. You bought your home with an FHA loan

If you bought your home with an FHA loan, you might have a reason to refinance. While such loans are a “great tool” for securing a home as a first-time buyer, there’s a required mortgage insurance premium, or MIP, that can be costly, said Ostrowski. Most new borrowers pay an annual MIP that is equivalent to 0.55% of their loan, according to government figures.

“If you got an FHA loan, it could make sense to refi for a rate that is only a little bit lower if you’re going to be able to knock out that mortgage insurance premium,” he said.

For example, on a $328,100 FHA mortgage, the owner would pay annual premiums at 0.55% rate for the life of the loan, equal to $150 monthly payments, according to calculations from Bankrate.

Read more at CNBC.com

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Why Pre-Approval Is Your Homebuying Game Changer

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If you’re thinking about buying a home, pre-approval is a crucial part of the process you definitely don’t want to skip.

So, before you start picturing yourself in your new living room or dining on your future all-season patio, be sure you’re working with a trusted lender to prioritize this essential step. Here’s why.

While home price growth is moderating and mortgage rates have been coming down in recent weeks, affordability is still tight.  At the same time, there’s a limited number of homes for sale right now, and that means ongoing competition among hopeful buyers. But, if you’re strategic, there are ways to navigate these waters – and pre-approval is the game changer.

What Pre-Approval Does for You

To understand why it’s such an important step, you need to know more about pre-approval. As part of the homebuying process, a lender looks at your finances to determine what they’re willing to loan you. From there, your lender will give you a pre-approval letter to help you understand how much money you can borrow. Freddie Mac explains it like this:

“A pre-approval is an indication from your lender that they are willing to lend you a certain amount of money to buy your future home. . . . Keep in mind that the loan amount in the pre-approval letter is the lender’s maximum offer. Ultimately, you should only borrow an amount you are comfortable repaying.”

Getting pre-approved starts to put you in the mindset of seeing the bigger financial picture, one step at a time. And the key is actually more than just getting a pre-approval letter from your lender. The combination of pre-approval and strategic budgeting is your golden ticket to understanding what you can actually afford. It saves you from painful heartaches down the road so you don’t fall in love with a house that might be out of reach.

Pre-Approval Helps Show Sellers You’re a Serious Buyer

But that’s just the beginning. Let’s face it, there are more people looking to buy than there are homes available for sale, and that creates competition among homebuyers. That means you could see yourself in a multiple-offer scenario when you get ready to make your move. But getting pre-approved for a mortgage can help you stand out from other buyers.

In today’s fast-moving housing market, having that pre-approval in your back pocket can be your secret weapon. When sellers see you’re pre-approved, it tells them you’re a strategic and serious buyer. In a world of multiple offers, that’s a big deal. As an article from the Wall Street Journal (WSJ) says:

“If you plan to use a mortgage for your home purchase, preapproval should be among the first steps in your search process. Not only can getting preapproved help you zero in on the right price range, but it can give you a leg up on other buyers, too.”

Pre-approval shows sellers you’re more than just a window shopper. You’re a buyer who’s already undergone a credit and financial check, making it more likely that the sale will move forward without unexpected delays or issues. Sellers love that because they see your offer as a reliable one. A win-win, right?

Bottom Line

So, before you start mentally arranging furniture in your dream home, let’s connect to get your pre-approval set. It’ll save you time, stress, and a lot of headaches that could come up along the way without it. The reality is, the more prepared you are, the more likely you are to land the home you’re longing for.

Read more at KeepingCurrentMatters.com

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Mortgage refinance demand jumps 19% after rates hit lowest level since July

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Homeowners looking to refinance are finding savings after mortgage rates dropped again last week.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) decreased to 7.07% from 7.17%, with points falling to 0.59 from 0.60 (including the origination fee) for loans with a 20% down payment, according to the Mortgage Bankers Association. That was the lowest level since July.

“Mortgage rates dropped last week, as incoming data point to a slowing economy and support a pivot by
the Federal Reserve to begin cutting rates next year,” said Mike Fratantoni, MBA senior vice president and chief economist.

As a result, applications to refinance a home loan increased 19% last week from the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Refinance demand was 27% higher than the same week one year ago.

“Borrowers who had seen rates near 8% earlier this fall are now seeing some lenders quote rates below 7%. Refinance volume picked up in response to this drop in rates, with a particularly notable increase for FHA and VA refinance applications,” Fratantoni added.

Applications for a mortgage to purchase a home rose 4% for the week but were still 18% lower than the same week one year ago. Homebuyers today may be getting a break from lower mortgage rates, but there is still tough competition in a market with high prices and few homes for sale.

Mortgage rates have not moved much this week, as economic data so far has come in aligned with expectations. That could change Wednesday, depending on the outcome of the latest Federal Reserve meeting and comments from Chair Jerome Powell. Markets expect the Fed to hold steady on its benchmark rate while anticipating cuts next year.

Read more at CNBC.com

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2 Ways to Avoid Getting Spammed While Shopping for Mortgage Rates Online

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Picture this: You were recently shopping around for mortgage rates — or you applied for a home loan online — and now your phone is figuratively ringing off the hook. The emails are flooding in, too, with lenders hounding you.

You just wanted to know how much your interest rate would be on that cute bungalow! But now you’re getting spammed. And even if you are a serious buyer and you applied for a mortgage, how did so many dang companies get your contact information?

One likely scenario: Your data was sold by a credit bureau, says Fred Winchar, co-founder and CEO of MaxCash, a financial broker that connects users with lenders.

When you apply for a loan with a mortgage company, the company pulls your credit record to determine your credit score, Winchar explains. The credit bureau now has the credit inquiry record, which they sell to other mortgage companies as leads. 

“This lets the other mortgage companies know you are shopping for a mortgage, so they get in touch with you to attempt to make a sale,” Winchar says. 

In case you were wondering, yep, credit bureaus can sell information about you to lenders and insurers, who can then send you unsolicited offers of credit or insurance through “prescreening offers.” You can opt out of these offers, though according to the Federal Trade Commission’s consumer advice. Here’s how to do so. 

The other likely scenario? When you apply for a mortgage, your application gets logged in various databases or within networks that are affiliated with the initial company, explains financial planner Jeff Rose, CFP, and the founder of GoodFinancialCents.com. 

“Some companies might also sell or share lead information with other lenders, especially if they can’t service your loan, leading to multiple companies reaching out to you,” he says.

In June, a California resident filed a class-action lawsuit against Rocket Mortgage LLC, alleging the company made unsolicited phone calls and sent text messages to those who are registered on the National Do Not Call Registry.

So, how do you shop for mortgage rates without getting inundated with unsolicited calls?

Consider using a separate email address and phone number (perhaps a Google Voice number) when shopping around to keep your primary contacts spam-free, Rose says. 

You can also explore online platforms that aggregate mortgage rates from various lenders, he suggests, allowing you to compare without directly providing your information to a slew of companies. 

To put a stop to the influx of calls and emails, consider registering your number with the National Do Not Call Registry, Rose suggests. 

It’s free to register your home or cell phone number, and it should show up on the registry the next day, he says. However, it can take up to a month for sales calls to stop. 

If you’re still getting a lot of unwanted calls, they might be from scammers, as the registry only stops sales calls from real companies, Rose explains. Charities, political groups, debt collectors, and survey takers can still reach you, too.

Another strategy is once you’ve identified potential mortgage deals and you’re ready to engage with lenders, reach out to them directly via their websites or phone numbers, suggests financial expert Young Pham, an editor with Biz Report.

The takeaway: If you’re hoping to shop around for a mortgage rate (and you should — you could save $84,000 over the life of your loan by doing comparisons, according to LendingTree), but you don’t want to be spammed with calls, consider opting out of prescreened offers and be sure you’re on the Do Not Call registry. 

Learn more at Apartmenttherapy.com

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