How Do I Document Self-Employment Income With My Lender?

Working with a mortgage company can be a long, frustrating process. Whether you are seeking to purchase a home, trying to refinance, or working with your current lender to modify your existing mortgage, the accurate verification of household income is a crucial piece to getting approved. Many Americans don’t earn a consistent paycheck twice a month.

Those who are self-employed or rely on tips, as well as commission based employees and landlords who receive cash payments from their tenants. Without a reliable system for documenting this money, many give “best guess” estimates. These guesses can be off by hundreds of dollars and the homeowner unwittingly created miles of red tape to sort through for themselves.

When it comes to working with a lender, especially when seeking a loan modification, proving your income can be a difficult task. The troubles are compounded exponentially when there is little to no documentation of income, or worse yet, the documents submitted contradict your stated income. For instance, a small business owner may have personal and business income and expenses all coming out of one checking account.

They may have $4000 a month to work with, but the only real documentation may be former tax returns. After a multitude of write offs, the income reported to the IRS may be substantially lower. If the tax returns of a homeowner indicate $14,000 of income for the year, then the lender may use $1,166 ($14,000/12) as the homeowner’s monthly income. Have specific questions? Click "Ask a question."

THIS APPROACH DEMONSTRATES THE NEED FOR INDEPENDENT BUSINESSPERSONS TO DO THREE THINGS:

1. Deposit your money. Create a paper trail. Whether it is cash, check, or money order, having it all go through one account will allow you to easily create income reports, profit and loss statements, etc. Many online banking services can do this with the click of a button.
2. Keep your money separate. Business expenses and income should all funnel through one account. Your paychecks or profits should then be paid to a separate checking account. This personal account is for household expenses like mortgage payments, utilities, groceries, car payments, etc.
3. Profit and loss. This simple form can create a monthly or quarterly snapshot of the business cash flow. These are often required when a self-employed homeowner is seeking assistance from their mortgage company.

TIPPED EMPLOYEES AND LANDLORDS ALSO FACE POTENTIAL DIFFICULTY DEMONSTRATING THEIR TAKE HOME PAY.

Cash goes into the pocket every shift, but often never makes it to the bank. Oftentimes the restaurant or bar will even cash the employee payroll checks in-house. This creates a logistical nightmare when it comes to proving how much money is coming in per month. There are two easy fixes here:

• Use your debit card. Get to the bank at least once a week, preferably after every shift or two. Deposit ALL cash rent, tips, and paychecks into the account. If you need cash, grab it at the ATM. This simple step will allow you to verify your current income situation.
• Record your tips. Use a simple pocket calendar or notebook. Carry it with your uniform and tools of the trade and get in the habit of jotting down your tip money after every shift. This information, if accurate, should corroborate the bank statement deposits.

Be prepared and patient when submitting documents for assistance, as response times can be 90 days or more. If you are currently working with your lender and they are no longer accepting payments, consider setting aside a set amount every month. This will indicate a level of affordability for them to consider. Be responsive to the lender’s request for additional information and keep a file that records the request as well as your response. Finally, keep the above tips in mind and you will find navigating the process of income verification much simpler and more streamlined.

For additional info, read How to Write an Effective Hardship Letter. Or if you have any housing questions for Malcolm, email him at financialcounseling@lssmn.org.

Looking for help creating your monthly spending plan or reaching your financial goals? Call LSS at 888.577.2227 and schedule an appointment with one of our Financial Counselors. We’re here to help you manage your debt and take control of your finances!

Author Malcolm Johannessen is a Certified Financial Counselor with LSS Financial Counseling and he specializes in Foreclosure Prevention Counseling.