Your Mortgage Loan and Cash Income
As a Mortgage Loan Officer I encounter a variety of scenarios from people desiring to purchase their first home. Let’s face it. Very few people can pay cash for their first home and therefore need to obtain a mortgage loan.
Very few first time home buyers understand the mortgage loan approval process. The buyer just looks at their own income and decides for themselves whether or not that they can make the new house payments. And if they can, then they think that the mortgage lender should approve their loan.
The bottom line is that the borrower has to provide proof of their credit worthiness in order to get approval for a mortgage loan on their new home. This proof consists of a good credit record (credit report and credit scores) AND proof of enough income to repay the loan.
Just today I had two scenarios presented to me by a real estate agent who was working with two couples that were prospective buyers. In both cases the husband worked in their father’s business and was paid in cash. They did not receive a W2 or 1099 at the end of the year. They did not report this money on their income tax and they did not deposit this money into a bank account. Therefore they had no paper trail that they even received an income.
Their lack of paper trail may work to keep them from paying their fair share of income taxes, but it works against them when it comes to being able to show an income in order to get a new home mortgage loan.
In both cases presented to me today the wives did not have enough income to qualify for a loan amount that was large enough to cover the price of the house that they wished to buy.
The same thing applies to part-time income that is paid in cash. You will not be able to include that income in order to help your debt to income ratio. Therefore you will not be able to qualify for a higher priced house that you may want. An example is a lady that I worked with who was paid $200 a month in cash by her church for her Sunday services of interpreting for the deft. She had to get her sister to be a co-borrower in order to show enough income to qualify for the house that she really wanted to buy.
If a person can show a really high credit score then they could get what is termed a “stated” mortgage. With this type mortgage a person is able to just state their income without proof. This type loan is really used more by investors whose funds are not usually a salary type income. One also normally pays a higher interest rate for this type loan. Normally a new first time home buyer does not have scores high enough to qualify for a stated loan, nor is it a practical loan for them due to the higher interest rate.
So, if you find yourself in this situation of getting paid cash with no paper trail, and you would like to obtain a home mortgage, borrow money to invest in a business or borrow money to purchase investment property, then you need to re-think you income situation.
If possible, change your income to be such that it is reported on a W2 at the end of the year. If that is not possible at least have the company issue a 1099 and then report these funds on your income tax. Yes, you will have to pay taxes but that is part of living in America and you can’t grow in your own wealth without establishing a healthy credit rating. In the long run you only hurt your own financial growth.
The author is a Mortgage Loan Officer and works with people everyday to get approved for a mortgage loan, improve credit scores and save on their approved mortgage closing costs.