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Can I Apply for a Home Loan Without a W2?

Lenders that provide home loans ask all applicants to provide proof of stable income as one of the pre-requisites to getting a mortgage. They do this, of course, to ensure that they are extending their loans to people who can actually afford to repay them.

The most common proof of income is the W2, an IRS tax form that shows how much money a person earned in the last calendar year with their employer. While there are other proof-of-income documents that exist, the most common is the W2.

If you don't have a W2, it's not impossible to get a home loan, but it certainly is more difficult. With the rise of freelancing and the gig economy, it's becoming increasingly common for people to earn at least part of their income from a source that doesn't provide a W2.

So, what do you do in this case, and can you still apply for a home loan without a W2? We'll describe the all the details of applying for a home loan without a W2 below.

Why Might You Not Have a W2?

There are a lot of legitimate reasons why you may not have a W2 that you can provide to a lender as part of the home loan application process. Anyone who owns their own business knows this well.

People who work for themselves won't get a W2 because they are responsible for generating their own income. In other words, while they may do work for other companies, they aren't employed as a worker on another company's payroll.

Even business owners who put themselves on their own company's payroll will only get a W2 for their regular salary. Any income the business generates must all be filed separately, and won't go on a W2.

In addition, any worker who earns income as an independent contractor will not receive a W2. Today, this is a group of people that is growing exponentially, as it includes freelancers and anyone who works in the gig economy as a driver, shopper and the like. Independent contractors may receive a 1099 from certain clients, depending on how much they earn in a calendar year, or some other tax documents.

Those forms, though, don't carry the same weight as a W2 because they aren't viewed from the same stability perspective. Most workers who receive W2 income are paid a stable rate on a consistent basis, which eliminates one of a mortgage company's biggest concerns -- an unpredictable change in income that prevents someone from repaying their loan.

What to Do if You Don't Have a W2

If you don't have a W2, you aren't automatically disqualified from getting a home loan. You may just need to provide additional documents and paperwork, and some lenders may require proof of income over a longer period of time than with a W2. 

Here's what you'll typically need to provide lenders in lieu of a W2, and some other steps you can take to put yourself in a better position.

Provide Tax Return Copies

If you don't have a W2, your lender is going to want to see other proof of income. In almost all cases, they're going to want to see copies of your annual tax return that you file with the IRS.

Many lenders will require that you show at least the last two years' worth of tax returns, if not more, which will show them that you're generating stable income for yourself. The nice part about this for those who don't have a W2 is your lender will be looking at documents that show your annual income, not your income on a monthly basis. This could be particularly beneficial to people who experience a lull in their income at points during the year or seasonality at their business.

Most lenders won't accept other documents as proof of your income. This means individual 1099s or spreadsheets where you track income won't suffice for proof of income. They'll require you to provide copies of your annual tax returns.

Improve Your Credit Score

Just like is the case with a W2, lenders won't only look at your total income and income source when deciding whether to offer you a home loan. They'll also look at your credit score and credit history to determine whether you are too risky.

Your credit score is important no matter where you get your income, but its importance becomes amplified if you don't have a W2. Some lenders may take a stricter approach when approving loans for people who don't have a W2, meaning that other factors such as your credit score and credit history would become even more important.

Pay Down Your Debt

Another metric lenders will look at is your DTI, or debt-to-income ratio. This compares your total monthly commitments in debt -- including the mortgage you're applying for -- to your monthly income. DTI is used in all home loan decisions, no matter the source of the applicant's income.

Again, though, the DTI may become more amplified if you don't have a W2. You can improve your DTI by paying down as much of your debt as possible before applying for a home loan. This will put you in the best light when lenders consider your application.

Have a Nice Down Payment

An extremely effective way of quelling lenders' concerns is to make a sizable down payment on the home you want to purchase. This is a rule that can be applied to any home loan application. The larger the down payment you're willing to make, the less chance the lender is taking extending you the loan and the more likely you are to get approved.

If you don't have a W2, try to make a down payment of at least 20% of the home's purchase price. The side benefit of doing this -- in addition to giving yourself the best chance to get approved -- is you'll avoid paying a monthly PMI on top of your mortgage payment.

Get a Co-Signer

If you can't find a lender that is willing to extend you a home loan offer based on your entire financial situation, consider getting a co-signer who has W2 income. Adding another person to your loan with a more stable source of income could help boost your chances of obtaining a home loan.

Your co-signer would technically be responsible for the entirety of the loan. So, you're likely to only get a family member or trusted friend to agree to help you in this regard. But, if you need help and someone is willing to come to your aid, having a co-signer could improve your chances of getting approved for a home loan even more. 


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