No income verification: Can I still get a loan?

Lenders aren't merely doing borrowers a favor when extending a new loan. Banks have to protect their bottom line by making sure that borrowers will be able to manage their ongoing payments and pay back the bank entirely. “No doc” loans—that is, loans without the usual supporting documentation showing a full picture of a borrower's solvency—are less common now than they were in the days leading up to the 2008 financial crisis.

Today, a loan application will usually require a borrower to provide formal proof of income from a current or past employer, but there are alternative ways for borrowers to show their earnings and prove their ability to honor the loan’s terms. Pay stubs, credit history, bank statements, references, and contracts often can suffice to prove that a borrower is creditworthy. Additional fees and premiums also may apply as lenders seek to better protect themselves against risky borrowers who may be likely to default.

A brief history of loans without income verification

Before the financial crisis of 2008, it was fairly common for lenders to issue loans without formally verifying an applicant’s income in any fashion. According to a 2011 report (http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf) by the National Commission on the Causes of the Financial Economic Crisis in the United States, home loans without income verification made up 2% of mortgages in 2000 and 9% by 2007.

The motivations for so-called “no income verification” loans were tied to how banks managed these financial arrangements. Employees who issued a new loan typically received a commission on the transaction regardless of whether a borrower was actually in the position to repay. Banks also frequently packaged and resold their loan contracts to third parties, essentially freeing the banks from worry about whether a borrower would default.

As the rubble from the Great Recession started to clear, the federal government intervened and issued new standards in order to prevent banks from issuing “subprime”—or high-risk—loans in the future. With the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the U.S. government created a new series of “ability to repay” guidelines (https://www.investopedia.com/terms/a/ability-to-repay.asp) for financial institutions to consider when evaluating a new loan application. Ability-to-repay requirements include employment status, credit history, and other ongoing credit arrangements.

Regardless of new regulations, banks still get to decide when to issue a loan, based on their “good faith” assessment of a would-be borrower’s creditworthiness, so it is ultimately up to them to ensure that an applicant is qualified.

When income verification isn’t an option

If an employee is working under a typical salaried arrangement, it usually isn’t difficult to secure proof of income. Other employment arrangements may prove more complex for securing income verification, including the following:

• Commission-based work: Workers who are compensated primarily via commission may have major changes in their ongoing compensation, depending on performance. This can make it difficult for lenders to gauge a borrower’s month-to-month solvency.
• Real estate investing: Real estate investors’ income often shows a recent net loss due to large investments or market downturns, despite decent cash flow.
• Entrepreneurship: Self-employed workers may have periodic breaks in work or extended contract negotiations that limit their time actually earning.

Regardless of the reason, it’s usually necessary for loan applicants to find a way to prove that they’ll honor their debt.

No income verification loan options

Salaried income makes up the majority of earnings for most borrowers, so it’s imperative that they be able to provide some kind of proof of ongoing employment income. A formal verification of employment and income usually takes the form of an employment-verification letter or a state-specific form, such as Texas’ Form H1028.

If an employee is unable to secure such a letter, whether due to a bad relationship with their employer or because the company doesn’t have a process set up for issuing such verification, other methods can suffice to prove earnings:

Pay stubs

An employee’s periodic pay stubs can serve as proof of income, though they are merely a historical record and don’t include any information about earnings to come.

When supplying pay stubs to a lender, borrowers should include as many records as possible to demonstrate the length of their employment and the nature of their ongoing payments.

Credit History

Credit history is usually also a major factor in most loan decisions because it reflects a borrower’s past management of their credit arrangements.

A credit report doesn’t provide any employment verification information, however, so it usually is not sufficient on its own to secure a loan or a mortgage.

Bank Statements

If pay stubs aren’t available, bank statements showing regular payment from an employer can also help prove an applicant’s income. Applicants using pay stubs should gather as many as they can to build the strongest case for their solvency.

References

Sometimes new or smaller employers may not have HR departments that can handle requests for employment or income verification. In these cases, references who can verbally confirm your salary and relationship with a company can often give lenders adequate information about your employment and income information.

Contracts & Agreements

Arguably the least compelling proof of these earnings documents, contracts don’t provide any information about whether an employee has accepted an offer or started work.

Most lenders will require some combination of these proof points when evaluating an application.

Tips for securing a loan with no income verification

When applying for a loan without formal income verification, there are several steps you can take to boost your likelihood of securing the new credit:

• Protect your credit score. “ Very good” credit includes a FICO score of 740 or higher. If your credit rating is below “very good,” try to take steps to improve your score by paying down existing debt or contacting your lenders to try to negotiate new terms for debt settlement.
• Present a large down payment. If possible, borrowers should make as large a down payment as possible on their loan to help secure reasonable borrowing terms.
• Gather your tax returns. In addition to the documentation listed above, annual tax returns can give a good picture of your year-to-year earnings and help lenders gauge your projected income.

Securing a new loan responsibly

Loans that don’t require income verification are possible, but they’re usually more difficult to secure. Occasionally, lenders will charge higher interest rates for borrowers who are unable to provide income, so borrowers should be careful not to take on unmanageable loans. An ability to prove income may highlight a financial problem that could make loan management impossible, so borrowers should be sure to consider how a loan fits in with their larger financial picture whenever they’re considering taking on new debt.