You Make Boatloads of Cash, but Still Can't Get a Mortgage?!

Piggy bank

When you apply for a mortgage, there are a few no-brainer items almost every borrower knows the lender will look at: your credit scores, your income and your debts.

You can check your credit scores and debt situation before you approach a lender by pulling your free annual credit reports (which you can do once a year at and checking your credit scores (which you can do for free on But getting a full understanding of your income can be tricky. It is not by happenstance that lenders place high importance on income, but rather microscopic compliance regulations imposed on them by regulators.

A mortgage lender is going to look at your income as a means to offset your proposed mortgage payment liability (in term of qualifying, this is comprised of principal and interest, taxes, insurance and any other costs associated with carrying real estate such as private mortgage insurance or a homeowners association payment). As a general rule, the lender will want your income to be 55% greater than your outgoing mortgage payment, plus other liabilities such as student loan or credit card payments. Your income has a significant impact on how much home you can afford (you can crunch the numbers using this cool home affordability calculator).

However, let’s say you have a W-2 income, and you also have additional income coming in via a nontraditional source. There are circumstances that can disqualify that nontraditional-source income from consideration, meaning you would not be able to borrow as much, simply put.

If you have one or more alternative income sources, here are some tips for making sure these sources don’t slow down your mortgage process (or stop it entirely).

1. Renting a Room in Your Current Home May Not Count

The extra $600 per month you receive from renting out a room in your home – known as “border income” — will not be counted as income for a mortgage payment. However, there is one exception to this rule: Your property must be multi-unit, the second unit must have a bedroom, bathroom and bona fide kitchen in order for it to be considered a unit in order to use revenue generated from that rent for mortgage-qualifying purposes. But if it’s just an additional room in your single-family home that you’re renting out, a lender typically will not allow that income to count directly toward your borrowing power. However, it can go toward down payment funds in a savings account that can then be used to help acquire the home.

2. Rental Income Has Some Catches

Most lenders allow 75% of the rental income to help qualify a borrower on the acquisition of a rental property. The Schedule E of the federal tax return identifies not only the rental properties and the gross rents collected, but also the expenses associated with owning real estate. These additional expenses at the end of the year can reduce the income needed to otherwise offset the mortgage payment. Be cautious when hoping to use your potential rental income to qualify. Expect a home loan lender to average net losses and/or net gains over the most recent 24 months.

3. Cash Isn’t King

Cash, from side jobs in particular, or any other income you receive that you don’t report to IRS is not going to be considered real income. Lenders don’t take kindly to tax cheats. However, these monies can help with down payment funds so long as the money is seasoned in a bank account – you can’t pull a wad of cash out from under the mattress. Lenders will want to see the borrower’s past two months of asset statements when applying.

4. Self-Employed Borrowers Beware

A big mistake self-employed borrowers usually make when they apply for a mortgage is thinking they earn more money than they really do. The Schedule C on a Sole Proprietorship tax return does show gross receipts, but lenders don’t use gross receipts to qualify, they use the net income figures after expenses including depletion, depreciation, business use of the home and net profit because those are the figures for which you’re paying taxes. Nine times out of 10, these figures are far less than the gross receipts.

Also in this arena, using bank statements’ gross revenue as a tax return alternative won’t fly with 99.9% of the lenders making residential mortgage loans. While there may be a small pocket of banks offering such nontraditional financing, the lenders offering the super-low Fannie Mae/Freddie Mac rates want to see your Schedule C, and specifically what income you actually pay taxes on.

5. Trust Fund Income

If you have a trust fund, you will need to provide these details to a lender: trust income you receive, terms of payment, duration of the trust and a non-taxable portion with at least a three-year continuance. Otherwise, this income will not be considered for your mortgage qualification.

It very well may come to light that for whatever reason you don’t have supportable income on paper necessary to count against a mortgage. Fear not, you can create income to qualify!  By paying off debt such as a car loan, you increase your income to qualify. For example, let’s say you have a car payment of $500 per month, with a balance left at $10,000. Paying off the car with capital of $10,000 creates $500 per month more in income (not factoring in taxes as the lender uses pretax income to qualify). In other words, you just gave yourself a $6,000 (6k/12 = 500) per year raise that will be counted in qualifying for a mortgage.

Other Options for Legitimately Boosting Your Income for Lenders

  • Taking Social Security early.
  • Taking an IRA distribution.
  • Creating dividend income via a withdrawal over time from an asset account.
  • Getting a co-signer.
  • Generating more revenue, showing higher net profit on a Schedule C.
  • Raising your credit score. This could work if your score is raised high enough to fit you into an alternative loan program that would give you a lower monthly payment, which would thus require less income to qualify.

While good credit and savings are absolutely important in the mortgage application process, income reigns supreme in today’s lending environment. An individual with stellar credit and $1 million in the bank but with low “traditional” income won’t have much luck qualifying for a mortgage anytime soon. Have alternative income? Be prepared to support the income with information, because the lender will ask.

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Scott Sheldon is a senior loan officer and consumer advocate based in Santa Rosa, Cali. His work has appeared in Yahoo! Homes, CNN Money, MarketWatch and The Wall Street Journal. Connect with him at Sonoma County Mortgages