3 keys to qualify for mortgage using cash income

3 keys to qualify for mortgage using cash income

By Tara-Nicholle Nelson
Inman News™

Q: For the past year I have been holding two part-time jobs: one job pays me in cash only and the other pays me with a traditional paycheck. The job that pays me in cash allows me to save about $3,000 per month, which I put into a savings account, so I have quite a bit of cash saved up. I am planning to buy a house within the next year. I would like to use this savings toward my down payment. Will this be questioned or cause me problems?

A: First, you should be very proud of yourself for having the discipline and drive to both work two jobs and to save up such a significant amount every month. But you're smart to ask in advance about how your cash income will be construed by lenders. In terms of your down payment, all funds that have been in your accounts for two months or longer at the time your loan is being underwritten are presumed to be yours by a lender.

Your bigger challenge will arise in the event that you want or need the lender to consider that $3,000 per month in cash income as part of the income that qualifies you for the mortgage. If so, there are several things you'll need to put in place.

First, if this is a part-time job, you'll probably need to be able to document that you've been there at least two years for the lender to allow you to use it to qualify.

Second, be prepared to produce a letter from your employer, known in the industry as a continuity letter, essentially verifying your employment and indicating that your employment is "expected to continue."

And third, as with any sort of income, you will be required to produce two years' worth of federal income tax returns; the bank will average your taxable income from the last two years and use that as the baseline income upon which you'll be qualified. (If you haven't been paying taxes on your cash income, but you will want or need to use it to qualify for a home loan, now's the time to meet with your tax preparer and your mortgage broker and evaluate whether it makes sense to file an amended tax return and pay the appropriate taxes on your income.)

Depending on the specific facts of your situation, your lender might require you to jump through additional hoops in terms of documenting that income; on the other hand, you might not need the income to count for mortgage purposes if you can qualify for a large enough home loan on the basis of your traditionally paid income.

Long story short: Loop your mortgage broker or other lending professional in on your situation, stat, so you can begin the process of positioning and documenting this income to make the most of it in your mortgage application and qualification process.

Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com