How to buy a house without proof of income

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A home may be the largest purchase you’ll ever make. 

Especially with the median U.S. home listing price reaching new all-time highs of $450,000 in June 2022, according to data from Realtor.com. If you’re among the 88% of homebuyers who finance their home purchase, then you’ll have to go through the mortgage approval process.

Qualifying for a mortgage isn’t necessarily difficult, but it can be a tedious process and requires a lot of documentation. Because of the significant amount of money borrowed for a home, lenders have strict requirements to ensure you have sufficient income to make your monthly payments.

Here’s what you’ll need when applying for a mortgage.

What Is the Mortgage Approval Process?

The mortgage approval process is one of the most vital steps to your home purchase.U nfortunately, it can also feel the most daunting. In general, there are 6 steps to the process, which can take anywhere from several weeks to several months.

Before you apply for a mortgage, make sure you have the required employment history that lenders look for and that you can provide suitable proof of income.

Step 1: Pre-approval

While not officially a part of the mortgage approval process, most buyers get pre-approved for a loan before they start shopping. This gives them an idea of how much their lender will give them in a mortgage, and makes them a more competitive bidder when making an offer on a home.

Step 2: Application

Once you’ve found your home and your offer has been accepted, you officially apply for your mortgage. At this point, your mortgage lender will do a thorough check of your credit history, income, assets, debts, and all other financial factors.

Step 3: Income Verification

One of the most important steps of the mortgage process is income verification, where your lender will look at the documents you’ve provided to confirm you have enough stable income to make your mortgage payments.

Pro Tip

The best way to ensure your chances of being approved for a mortgage is to have all of your necessary documents available and organized. Depending on your employment situation, these documents may include pay stubs, W-2 forms, tax returns, profit and loss statements, and bank statements.

Step 4: Appraisal

Before a lender can approve a mortgage, a home appraisal must take place. The lender determines the maximum loan amount based on the appraisal.

Step 5: Title search and insurance

Before a mortgage can close, the lender will require a title search and title insurance through a title company. This step ensures that no other person or company has a legal claim to the house.

Step 6: Decision

Finally, the lender will make a decision on your loan. In general, the lender will either approve or deny your application, but they may also suspend your application if they can’t verify all of your financial information.

“Mortgage approval is based on three key components,” said Melissa Cohn, an executive mortgage banker at William Raveis Mortgage. “One is your credit. Have you shown, with a good credit score, the ability to borrow and pay it back within a timely manner? Two, do you have enough cash in the bank to get the deal done? Do you have enough money for the down payment, closing costs, and reserves? Lenders today usually want reserves of a certain number of months as a rainy day fund. Lastly, do you have the income to qualify?”

How Much Income Do You Need to Buy a Home?

Your income is one of the most important factors lenders consider when you apply for a mortgage. But there’s no minimum amount of income you’ll need to buy a home. Instead, lenders look at your debt-to-income ratio, which shows the percentage of your gross monthly income that goes toward debt obligations.

“What the lender would be reviewing when issuing a pre-approval is what we call DTI, which stands for debt to income ratio,” said Polina Solis, a Realtor in Texas. “There are certain loan packages, such as conventional versus FHA, which have different DTI requirements. Generally speaking, you don’t want to have your home monthly payment be more than 30% of your gross income.”

There are two ratios lenders will look at. Your front-end DTI is your future monthly housing expenses compared to your gross monthly income. Your back-end DTI is all of your debt payments, including your housing payments, compared to your gross monthly income.

An acceptable DTI to purchase a home depends on other factors, including your credit score. But according to Solis, lenders generally require that borrowers have a DTI of no more than 45%. In some cases, they may be willing to allow for as high as 50% if the borrower has exceptional credit and additional cash reserves.

While lenders may allow up to 45% or 50% DTI in some situations, a more commonly-known rule of thumb is the 28/36 rule, which says that your front-end ratio should be no more than 28%, and your back-end ratio should be no more than 36%.

Proof of Income for a Mortgage Loan

When you apply for your mortgage, your lender will require several documents to prove that your income is as you’ve stated. For W-2 employees working in a traditional employment situation, this step is fairly simple. You’ll have to provide your latest pay stubs, as well as two years of tax returns and W-2 forms.

Though you must provide two years of tax returns, lenders don’t actually require that you be at the same job for two full years. Instead, they’ll require two years of consistent income, preferably within the same field.

Things become a bit more complicated if you work in a job where your income is reliant on bonuses or commissions. According to Cohn, you’ll generally need at least two years of bonus or commission income for a lender to consider it, though it could be as little as one year if it’s offset by other factors.

If your variable income from the most recent year was higher than the previous year, they’d take an average of the two numbers. If the most recent year’s income was lower, they’d only use the lower number.

What If You’re Self-Employed?

The requirements for qualifying for a mortgage are even stricter when you’re self-employed. Unlike W-2 employees, most lenders will require that a self-employed individual have at least two years of income in their business.

“It doesn’t have to be difficult as long as you have all the documents required,” said Jeff Shipwash, real estate investor and owner of Shipwash Properties. “The most common situation is a single-member or partnership LLC or people with a DBA as a sole proprietor. You have to provide two years of tax returns. Tax returns can be unique depending on your situation, but typically the best thing to do to supplement those is to provide audited financial statements from a CPA.”

In addition to your tax returns, lenders may ask to see profit and loss statements or bank statements for the current year to ensure your income situation hasn’t changed.

It’s important to note that when lenders look at your tax returns when you’re self-employed, they’re really looking at the adjusted gross income (AGI) on your Schedule C. Your AGI is all of your business income minus any expenses and deductions. While you might feel your gross income is sufficient to qualify for a mortgage, it’s really your AGI that matters.

“The best advice my accountant gave me that I think applies in this situation is, ‘Always think like an auditor, and you will be fine,’” Shipwash said. “Track and document everything in a way that would allow an auditor to verify it in less than 5 minutes. When you keep and manage your records that efficiently, it makes obtaining financing so much easier.”

Can You Receive Money for a Down Payment From a Friend or Relative?

Lenders generally allow homebuyers to receive gift money from loved ones for their down payment. Under Fannie Mae and Freddie Mac’s requirements, these gifts can only come from a family member related by blood, marriage, adoption, or legal guardianship. The gift may also come from a fiancé or domestic partner.

If you receive your down payment money as a gift, you’ll also have to provide a gift letter written by the donor. The gift letter should specify the dollar amount of the gift, the date, and confirmation that the gift isn’t a loan and no repayment is expected.

The Bottom Line

When you’re applying for a mortgage, lenders want to make absolutely sure you’ll be able to make your mortgage payments each month. As a result, they have strict requirements for a borrower’s employment history and proof of income. The process can feel overwhelming, especially as a first-time homebuyer.

The best course of action is to surround yourself with professionals who can guide you through the process. Find a trustworthy real estate agent and mortgage lender so you can ask questions and feel confident moving forward.

Frequently Asked Questions: FAQ

How long do I need to show income for a mortgage?

The standard qualification rules for a conventional mortgage, the more popular mortgage type, generally require at least two years of employment history. There are, however, circumstances where a lender would work with a borrower outside of this standard. Other loan types, such as FHA or VA loans, the requirements will differ by lender. 

What is needed as proof of income for a mortgage?

For proof of income, typically, lenders will need to collect:

• Employment pay stubs
• Bank Statements
• W2