Having unverifiable income can restrict your mortgage choices, but here's how to overcome it.

• Lenders require financial capability proof and may request documents such as tax returns, W-2s, and pay stubs to determine your ability to repay the loan.
• LendingTree economist Jacob Channel stated that any income earned that isn't reported on a W-2 form can make it challenging for lenders to verify annual income.
• Here's what to know.

One reason your mortgage application may be denied is due to "unverifiable income."

Freddie Mac states that mortgage lenders assess your financial capability to repay the loan by requiring documents such as your federal income tax returns, W-2, and current pay stubs.

LendingTree economist Jacob Channel stated that any income earned that isn't reported on a W-2 or 1099 form can make it challenging for lenders to verify annual income.

Verifying income from a rental property, gifted cash for a down payment, or side hustle earnings may be challenging for a mortgage lender.

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

The 2024 Profile of Homebuyers and Sellers report by the National Association of Realtors states that approximately 12% of recent prospective homebuyers were denied a mortgage due to the lender's inability to verify their income.

In the period from July 2023 to June 2024, 5,390 buyers who purchased a primary residence were surveyed by the NAR.

If you have multiple sources of income or are self-employed, it may be beneficial to explore non-traditional mortgage options, advised Melissa Cohn, the regional vice president of William Raveis Mortgage in New York.

""Although there are programs available for those who don't qualify conventionally, it comes at a higher cost," she stated."

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

Non-QM lenders can use bank statements to verify income for self-employed individuals instead of pay stubs, tax returns, or W-2s.

Channel stated that they may examine the nature of your assets.

If you're self-employed in a business you own, other banks and lenders will accept the most recent 1099 instead of relying on tax returns, according to Cohn.

A sales manager at Bay Equity, a Redfin-owned mortgage lender, stated that while qualifying for loans through income may be easier, these loans can be more expensive.

To obtain mortgages, you may need to go through additional steps.

You may need to provide a larger deposit or have a higher credit score to qualify for the loan.

Non-QM loans may have a higher interest rate than conventional loans because they do not adhere to the qualifications set by the Consumer Financial Protection Bureau.

In the first half of 2024, the average initial interest rate for non-QM loans was 6.7%, higher than the 6.4% rate for qualified loans, according to CoreLogic data.

A 'stepping stone' for unverified income

Real estate investors and wealthy individuals with multiple assets may benefit more from non-QM loans, according to Channel.

He suggested substituting assets for active income in certain situations.

It's wise to begin with conventional loan options, even if you anticipate difficulty verifying your income.

It's possible that you submitted the incorrect W-2 form. Errors can occur.

Starting a new job with a new company or transitioning from employment to self-employment could benefit from a non-QM loan, according to Cohn.

Experts suggest that you can always apply for a refinance in the future once you start showing sufficient income on your returns.