The Role of Alternative Income Documentation in Refinancing

Mortgage refinancing – which can be a great way to lower interest rates, save money, consolidate debt, or access cash for home improvements – is often readily available to traditional borrowers but can feel out of reach for those with non-traditional incomes. In today’s reality, more people than ever prefer flexible work arrangements such as freelance or gig work; the traditional W-2 income model is becoming less popular. Thus, according to Forbes, “36 percent of U.S. workers could be classified as freelancers or independent workers, and that at its current rate of expansion, more than half of the workforce will be part of the U.S. gig economy by 2027.” This shift has made it difficult for many unconventional borrowers to qualify, as lenders often require W-2s and tax returns, leaving such applicants out in the cold. But there is a way out – alternative income documentation in refinancing.

Imagine being able to help clients who were previously denied refinancing because of their non-traditional income sources. By helping to gather the right documentation, such as bank statements, contracts, 1099 forms, or business records, and submitting them to the right lender, you can effectively demonstrate your client’s financial stability and earning potential to qualify for refinancing. A&D Mortgage may be just that right mortgage lender. With a flexible approach to alternative income documentation, we offer refinance solutions designed for borrowers with unconventional income streams. With our support, you can help applicants who were once overlooked, giving them the opportunity to refinance and achieve their financial goals. First, however, it’s essential for you as a mortgage broker to understand how borrowers with non-traditional incomes can qualify for refinancing by providing alternative documentation – this article is designed to guide you through this process.

What Is Alternative Income Documentation?

Alternative income documentation is a way for a borrower to prove income to lenders even if they do not receive regular W-2 wages and are unable to provide traditional pay stubs or tax returns. Instead, applicants can submit documents like bank statements, profit and loss statements, business records, or 1099 forms to demonstrate their ability to repay a loan. Refinancing with such alternative income documents can be particularly helpful for the self-employed or those working in gig-based industries, where income can fluctuate from month to month. For example, freelancers, independent contractors, and small business owners often have irregular cash flows, making it difficult to present a clear picture of income using standard documents.

While traditional income verification through pay stubs, W-2s, and tax returns relies heavily on consistent, verifiable wages from an employer, alternative income documentation focuses on the overall financial health of the borrower. It often represents a deeper analysis of a borrower’s financial situation, taking into account factors beyond their current income. That way, alternative income documentation provides an even more accurate picture of a borrower’s capacity because it considers a wider range of income sources and financial situations, offering a more comprehensive view of their ability to manage mortgage payments. In essence, alt-doc income verification allows lenders to gain clear insights into the applicant’s income stability and ability to manage debt and ultimately make more confident decisions about loan refinancing eligibility.

The Role of Alternative Income Documentation in Refinancing

For non-traditional borrowers, alternative income documentation is more than just an opportunity to refinance. By using alternative sources to verify their income, they can significantly streamline the refinance process and expedite approvals. This is largely because alternative income documentation, such as bank statements or 1099 forms, is quick and easy for borrowers to collect and for lenders to verify, while traditional refinancing often requires extensive documentation that can be time-consuming to gather. In addition, the underwriting process for alternative income documentation can often be faster because it focuses on income streams rather than traditional employment verification. Also, lenders that offer alt-doc refinancing often have fewer documentation requirements, saving your clients both time and stress during the refinancing process.

Benefits of Alternative Income Documentation in Refinancing

Beyond speeding up the process, alternative income documentation offers several other benefits to borrowers.

1. This approach can increase the chances of approval for borrowers who may have difficulty qualifying using traditional methods, as it provides lenders with a more complete picture of a borrower’s financial situation by highlighting trends over time and the consistency of deposits.
2. What’s more, lenders that accept alternative documentation tend to have more flexible criteria, focusing on the applicant’s overall financial health rather than adhering strictly to rigid income guidelines. This can be especially beneficial for borrowers who have recently started a business or experienced a career change, helping them qualify for refinancing when they might not have otherwise.
3. Additionally, it opens up more options for borrowers, as many lenders offering alt-doc refinancing programs provide a wider range of products and terms to meet the unique needs of unconventional income earners.

At A&D Mortgage, we understand that not all borrowers fit the traditional mold. That’s why we offer a variety of refinancing options that accommodate unconventional income streams. Our experienced team can work with you to determine the most appropriate documentation package for your client and guide you through the entire process. So, if your client is facing challenges with traditional refinancing, consider exploring the possibilities of alternative income documentation with A&D.

Types of Alternative Income Documentation

When it comes to a no-income verification refinance, borrowers have several options for proving their financial stability through various documents. Let’s take a closer look at some of the most common types of alternative documentation.

Bank Statements

One common type of alternative income documentation is bank statements. Bank statements are records of all transactions that have taken place in a bank account over a specific period of time. They can be used to show consistent deposits, which may indicate a stable income stream. For example, if your client is self-employed and receives payments from multiple sources, bank statements can help demonstrate that they have sufficient income to support mortgage refinancing.

Bank Statement:
Empower your clients!

• The perfect fit for self-employed borrowers
• Up to 90% CLTV, loans up to $4M
• Low FICO options (from 599)

See Program Details

1099 Forms

Another type of alternative income documentation that may be accepted for refinancing qualification is the 1099 form. According to Investopedia, “The 1099 form is used to report non-employment income to the Internal Revenue Service (IRS).” It is a document that reports overall annual earnings from miscellaneous sources, such as freelance work, contract labor, or rental property. If your client is a contractor or gig worker, they will likely receive a 1099 form from the companies they work for. Thus, this form can be used to document their income and support their refinancing application.

Profit and Loss Statements

Business owners can provide profit and loss statements as an alternative form of income documentation. They show a company’s revenues, expenses, and net income over a specific period of time. These statements can be used to demonstrate the profitability of your client’s business and their ability to afford the mortgage refinance.

WVOEs

Sometimes, under special programs, a Written Verification of Employment (WVOE) form can also serve as alternative income documentation. This can be in the form of a letter or a document from your client’s employer confirming their employment status, job title, salary, and length of service. This can be provided by borrowers who have a history of irregular or fluctuating income and are unable to provide traditional income documentation, such as pay stubs or tax returns.

Rental Income Statements

Real estate investors can provide rental income statements as alternative documentation for refinancing. These statements provide a detailed breakdown of rental income and expenses. They can be particularly helpful if your client has a significant amount of rental income that contributes to their overall financial stability.

When to Recommend Alternative Income Documentation for Refinancing

So, when should you recommend alternative income documentation for refinancing to your clients so as not to lead them astray but to steer them in the right direction? Here are three common scenarios you are most likely to encounter.

Self-employed individuals with fluctuating income

People who work independently often face income fluctuations throughout the year. One month, they might be raking in the dough. The next, it’s a dry spell. However, their overall financial picture can be quite stable. Traditional income verification won’t be able to adequately portray this ebb and flow, while alternative documents like bank statements and business records can be a lifesaver to showcase their financial management abilities.

For example, a self-employed freelancer may have a month of low income due to a lack of projects. However, their annual income could be substantial. By reviewing their bank statements and business records, you can assess their overall financial health and determine if they qualify for refinancing.

Learn more about loan solutions designed specifically for the self-employed in this blog post.

Borrowers with large deductions on tax returns

Some self-employed individuals and business owners can write off significant expenses on their tax returns. These can include expenses like office supplies, rent, utilities, and advertising costs. This reduces the amount of income they pay taxes on, making it appear lower than it is. But that doesn’t mean they’re struggling financially. Alternative documentation like bank statements or P&L statements can help paint a more accurate picture of their actual income.

For instance, a borrower with a home office deduction might have a lower reported income. By reviewing their bank statements and supporting documentation, a mortgage broker can verify their income and determine if they qualify for a refinance.

Learn how to help borrowers struggling to provide tax returns for a mortgage in this article.

Individuals unable to provide traditional W-2s

There are situations where borrowers may not be able to provide traditional W-2s. This could be for a variety of reasons, such as being self-employed or a gig worker, or even a recent job change. But, by providing bank statements or 1099s, they can still qualify for refinancing.

For example, a recent college graduate may not have a full year of W-2s. By providing pay stubs and bank statements, they can prove their income and qualify for a refinance.

By considering these scenarios and recommending alternative income documentation, you can help borrowers achieve their refinance goals and get the best possible terms.

Risks and Challenges of Using Alternative Income Documentation

Using alternative income documentation to refinance can be a flexible option for borrowers, but it still presents some risks and challenges that both brokers and borrowers should be aware of.

• First, lenders may subject borrowers who use alternative income documentation for refinancing to more scrutiny. This is because lenders want to minimize risk and may require applicants to provide additional documentation to prove their financial stability.
• Second, some lenders may compensate for the perceived higher risk of unconventional borrowers by requiring borrowers to pay slightly higher interest rates or larger down payments.

To be prepared for the potential challenges associated with using alternative income documentation for refinancing purposes and to ensure a smooth process, it’s critical for mortgage brokers to maintain clear communication with both the borrower and the lender. By providing detailed information about the borrower’s income and financial situation, brokers can help lenders make justified refinance decisions and minimize potential delays.

How A&D Mortgage Supports Brokers with Alt-Doc Refinancing

At A&D Mortgage, we understand that every borrower’s financial situation is unique. We believe that whether an applicant is self-employed, a freelancer, a gig worker, an entrepreneur, or a business owner, they deserve the same access to financing for their needs. That’s why we offer a variety of alternative income documentation refinancing options to help you find the best solution for your clients.

Whether your client’s income can be verified through bank statements, 1099s, profit and loss statements, WVOEs, or assets, you are sure to find an appropriate solution for them in almost all of our Non-QM products (except DSCR loan), with competitive rates and fast approval processes.

Partnering with A&D Mortgage allows you to expand your offerings and better serve clients who may otherwise have difficulty qualifying for traditional refinancing. Our team works hard to get your clients the financing they need without the red tape. And we’re always here to answer your questions and guide you through the process.

Conclusion

For borrowers with non-traditional sources of income, alternative documentation is a flexible and viable option for refinancing. For you as a broker, it’s a way to broaden your services and help more clients achieve their financial goals. If you understand the different types of alternative documentation, know when to recommend them for refinancing, and can assess the risks and challenges associated with them, you will be able to provide an invaluable service and grow your business.

Ready to help more borrowers? Partner with A&D Mortgage. We offer a range of alternative income documentation options and a dedicated team to support you. Don’t let your clients miss out on the benefits of refinancing. Contact A&D Mortgage today to learn more about how alternative income documentation can help you close more deals and grow your business