How to Get a Mortgage Without W-2 Income

Getting a mortgage can be challenging, but it’s far more complicated for those without full-time W-2 income. If you’re self-employed, a freelancer, or an independent contractor, it’s still possible to get a mortgage using alternative documentation and underwriting methods. In this article, we’ll explore the basics of getting a mortgage without W-2 income, the key requirements, and how to apply.

Understanding Mortgages Without W-2 Income

Non-W-2 income mortgages are used by self-employed individuals, small business owners, and those with unconventional income sources. These mortgages use alternative documentation like bank statements and tax returns to demonstrate income. In most cases, self-employed individuals usually need to provide multiple years of tax returns and bank statements to verify their income in lieu of paystubs. 

Because self-employed income can be considered less steady or reliable, some lenders have stricter underwriting guidelines and require additional documentation for non-W-2 income mortgages. Additionally, interest rates on non-W-2 income mortgages can be slightly higher than traditional W-2 income mortgages if a borrower’s income is considered unsteady.

The Basics of Non-W-2 Income Mortgages

When a full-time employee for a company applies for a mortgage, the lender typically uses their last several paystubs to verify their income. This is because full-time W-2 income is considered to be relatively steady and reliable (even as lay-offs have become more commonplace in recent years). 

Non-W-2 income mortgages, on the other hand, are used by borrowers who don’t have traditional W-2 income. These include self-employed individuals, freelancers, small business owners, and professional investors who don’t typically have paystubs or W-2 forms to demonstrate their income. 

When a person without W-2 income applies for a loan, they go through a more in-depth underwriting process that considers their overall financial situation, including cash flow, tax records, and other documents. 

Types of Loans for Borrowers without W-2 Income

Several types of loans don’t require a borrower to show W-2 income. In addition to conventional loans, these include no-document (or no-doc) loans, stated income loans, and bank statement loans. Many of these loans are designed for borrowers with non-traditional income sources or who are self-employed. 

Conventional Loans

If you’re self-employed or a full-time freelancer, you can still qualify for a conventional loan without W-2 income. You’ll need to go through a slightly more involved underwriting process, including demonstrated income using tax returns and bank statements rather than paystubs. To qualify for a conventional loan without W-2 income, you should have at least two years of tax returns that show sufficient self-employment income to establish a qualifying debt-to-income ratio.

Government-Sponsored Loans

Government-sponsored loans are those guaranteed by federal agencies like FHA, USDA, VA, and others. Like conventional loans, self-employed individuals can use many of these loan programs using income reflected on their tax returns.

No-Doc Mortgages

No-doc mortgages are a type of loan that doesn’t require extensive income and asset documentation. However, they often come with higher interest rates, stricter qualifying criteria, and larger down payments. These mortgages are far less common than conventional loans and can be considerably more expensive in the long run.

Bank Statement Loans

Bank statement loans are another type of mortgage typically underwritten using a borrower’s bank statements as proof of their income. These loans provide greater flexibility for self-employment income verification and usually come with slightly higher interest rates than conventional mortgages. However, some lenders specialize in these types of loans for self-employed individuals and can offer quick underwriting and competitive rates and terms to qualifying borrowers.

Key Requirements for Non-W-2 Mortgages

To qualify for a mortgage without W-2 income, you must demonstrate solid credit (600 is a common minimum credit score). You’ll also need to demonstrate a high debt-to-income ratio using your provable income – typically 43% or lower. Additionally, private lenders often require a higher down payment and reserves from borrowers without W-2 income. 

To qualify for a mortgage without W-2 income, you may need to provide additional documentation not required of applicants who are full-time employees. These may include bank statements, tax returns, or company profit and loss statements. Individual loan programs, like those provided by Fannie Mae, Freddie Mac, and FHA, may have unique requirements for non-W-2 income borrowers. 

Credit Score and History

Maintaining a good credit score is crucial for self-employed individuals seeking mortgages. Lenders consider credit history a measure of financial responsibility, and a higher credit score often leads to more favorable loan terms and interest rates. To increase the chances of approval, borrowers without W-2 income should focus on building and maintaining their credit. If you’re considering applying for a mortgage, consider checking your credit first and taking steps to boost your score – such as paying off other debts – before you apply.

Down Payment and Reserves

If you don’t have full-time W-2 income, you may be required to make a larger down payment or show cash reserves to qualify for a mortgage. These items help reduce the risk to a lender. For example, cash reserves help demonstrate that you can make your payments for several months if your income decreases unexpectedly.

Debt-to-Income Ratio

As with all mortgages, lenders evaluate borrowers’ debt-to-income ratio to assess their capacity to repay a loan. This ratio compares the borrower’s monthly debt payments to their monthly income. Lenders typically like to see a debt-to-income rate (based on qualifying income) of 43% or lower, though 30% or less is ideal. 

How to Apply for a Mortgage without W-2 Income

Applying for a mortgage is similar to applying for a loan as a W-2 employee. You’ll need to pick a lender, complete an application, and provide documentation to verify your income and other details.

Here are the key steps to successfully apply for a mortgage without W-2 income:

1. Prepare your documentation. Gather relevant financial documents such as previous tax returns, bank statements, and other proof of your income. If you’re self-employed, this may include 1099 forms, client contracts, or profit and loss statements.
2. Check your credit score and history. Ensure you have a solid credit score and a positive credit history. If necessary, take steps to improve your credit before applying.
3. Evaluate your debt-to-income ratio. Lower your debt-to-income ratio if it’s too high. This may involve paying off some debts or looking for ways to increase your income.
4. Save up your down payment and reserves. Since self-employed borrowers may be required to make a larger down payment, it’s crucial to start saving early. Additionally, robust financial reserves can increase your chances of loan approval.
5. Consult with a mortgage professional. Seek advice from a mortgage professional with experience helping self-employed individuals get mortgages. They can guide you through the specific requirements and application process.
6. Apply with a suitable lender. Submit your application to a lender specializing in underwriting mortgages using tax returns or bank statements. Provide all requested documents and wait for the lender’s response.

The Pros and Cons of Non-W-2 Income Mortgages

Applying for a mortgage without W-2 income isn’t always easy, but sometimes it’s the only route to home ownership. Below are some advantages and drawbacks of applying for a home loan without a full-time income.

Pros of Non-W-2 Income Mortgages

• No need for traditional employment: Unlike traditional mortgages that require an applicant to have a typical job with regular paychecks, non-W-2 income mortgages look at an applicant’s finances more holistically. This allows individuals with non-traditional employment to still qualify for a home loan. It expands opportunities for home ownership to those who may otherwise be ineligible for financing.
• Accommodates for fluctuating income: Non-W-2 income mortgages can be an excellent choice for individuals with fluctuating income. Looking at a broader picture of the borrower’s financial situation, like their overall cash flow, allows for a more accurate representation of an individual’s ability to repay the loan.
• Opportunity to leverage business expenses: For self-employed individuals, business expenses and non-cash deductions like depreciation can significantly reduce the taxable income that traditional lenders would assess. Non-W-2 income mortgages allow individuals to use their gross income before deductions for qualification purposes. This can result in a higher qualifying income and a larger loan amount.
• Independent contractors and gig workers can qualify: In today’s gig economy, more people earn their living as independent contractors. Mortgages underwritten using bank statements and tax returns offer a unique opportunity for these individuals to qualify for home loans. By considering their total earnings, these mortgages can provide a solution for gig workers who may otherwise struggle to secure a traditional mortgage.

Cons of Non-W-2 Income Mortgages

• Higher interest rates: One possible downside to applying for a mortgage without W-2 income is that you may be charged a higher interest rate. This is because lenders perceive non-W-2 income as less reliable. As a result, lenders may charge higher interest rates as a form of risk compensation.
• More documentation required: Another potential drawback of non-W-2 income mortgages is the requirement for additional documentation. Non-W-2 borrowers may need to provide significant paperwork, such as bank statements, tax returns, or proof of business ownership. This can make the application process more complex and time-consuming.
• Greater scrutiny of financial health: Non-W-2 income borrowers may also face greater scrutiny of their financial health. Lenders may closely examine their income, expenses, assets, and liabilities. This in-depth financial review can be intrusive for some borrowers. It may even lead to a denial if the lender uncovers any red flags.
• Variable income considered risky: Lenders may view income that fluctuates from month to month or year to year as too risky to be considered in qualifying for a home loan. As a result, non-W-2 income borrowers may face challenges in proving their income stability and meeting the lender’s underwriting requirements.
• Limited lender options: Not all lenders offer non-W-2 income mortgages. This can limit the options available to borrowers, potentially making shopping around for the most competitive rates and terms more difficult.

Can You Refinance a Mortgage Without W-2 Income?

Refinancing options are available for borrowers without W-2 income. As with other types of financing, self-employed individuals, small business owners, and others who lack W-2 income can still refinance a home loan using the same process as any other borrower. However, as with securing a purchase loan, borrowers must demonstrate their income using bank statements, tax returns, and other documents to qualify.