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David A. Krebs is a licensed mortgage broker with over 15 years of experience offering loan options beyond traditional banks

In this series of articles (“Bank Turndowns”), we explore why borrowers are turned down by their bank for a loan, and how they can get approved by another lender. To access all the volumes in this series, go to our “Series” page here.

Under the Dodd-Frank Act, mortgage lenders cannot extend a loan unless they first determine that the borrower will have a “reasonable ability to repay the loan.” 26 C.F.R. 1026.43(c)(1).

Traditionally, large banks determine “ability to repay” based on a full checklist of documents from the borrower, including income tax returns, pay stubs, W-2s, and credit reports.

However, many borrowers do not meet those stringent documentation requirements. For some borrowers, the required documents simply do not exist (for example, self-employed borrowers do not have W-2s).
Or, other borrowers are able to supply the documents, but, for whatever reason, they still do not qualify (for example, banks may not consider W-2s if the borrower has not been employed for more than a year).
If you are looking for a home mortgage loan, but were unable to satisfy your bank’s documentation requirements, there are many alternative options for you.
Other lenders offer programs allowing you to show your “ability to repay the loan” in different ways.

#1: BANK STATEMENTS: Show your ability to repay based on your personal or business bank statements

Who is this program for?

  • This program may make sense for you if your true income is documented by your bank statements. For example, you may be self-employed without pay stubs.

How does this program work?

  • You provide personal or business bank statements (usually from the past 12 to 24 months), and the lender calculates the monthly average deposits to see if you have enough income to qualify.
  • The bank statements must be the most recently available at the time of application and must be consecutive. Multiple bank accounts may be used.
  • You have to show a track record. For example, if you are relying on self-employment income from your business, you must prove that your business has existed for a certain amount of time, such as two years.
  • If you choose to supply business bank statements (instead of personal statements), you must prove you own a certain percentage of the business, usually a majority ownership.

#2: ASSETS: Show your ability to repay based on your liquid assets

Who is this program for?

  • This program might work for you if you have substantial liquid assets (e.g., checking accounts, savings accounts, stocks, bonds, mutual funds, retirement assets).

How does this program work?

  • You show proof of assets totaling a certain minimum amount (lenders typically require at least $450,000 in post-closing assets), and the lender calculates whether those assets sufficiently demonstrate your ability to repay the loan.
  • Under this program, you can use the following assets to qualify: (1) checking, savings, or money market accounts; (2) stocks, bonds or mutual funds; and (3) 401(k), IRA, SEP, KEOGH, or other retirement accounts.
  • Lenders will consider 100% of the value of checking, savings and money market accounts, but will only consider a portion of the value of other assets (e.g., up to 90% for investment accounts, and up to 70% for retirement assets).
  • Lenders require that the assets be seasoned for a certain amount of time, usually at least 12 months.

#3: MISCELLANEOUS STREAMS OF INCOME: Show your ability to repay based on alternative streams of income

Who is this program for?

  • Lenders recognize that traditional wages from a full-time job are not the only source of income. You may boost your chances of qualifying if you can show alternative streams of income.

How does this program work?

Lenders may be willing to consider the following sources of income:

  • Rental income: You must prove current ownership and demonstrate your track record of rent payments from your tenants.
  • Short-term or variable rental income: You can rely on rental income received through Airbnb, VBRO, HomeAway, or other similar companies.
  • Boarder income: You can rely on income you receive from boarders who live on your property (lodging, meals, etc.)
  • Less than a 40-hour work week: Borrowers regularly scheduled for a work week less than 40 hours may be permitted to show their income.
  • Averaging of bonuses or commissions: Instead of regular wages, the lender may be willing to average your bonuses or commissions over a certain period of time.
  • Seasonal income: This may be considered if you can show a track record of at least two years, for example, and you expect to be rehired for the next couple of seasons.
  • Royalty income: You must show the total amount of royalty payments already received and prove how long you expect to continue collecting.
  • Trust income: Income from trusts may be used if the trust meets certain requirements, such as non-revocable trusts with consistent payments for a certain amount of years.
  • Second jobs: Lenders may consider income from your second job if it is stable and has been received for a certain amount of time already.
  • Child support or alimony: These income streams may count toward your eligibility if you expect to receive them on an ongoing basis, for example, for another three years.
  • Disability income: Long-term disability benefits may be used as qualifying income if documented for a certain amount of time, such as at least two years.

#4: ONE YEAR ONLY: Show your ability to repay based on only one year of income

Who is this program for?

  • Banks usually require at least two years worth of documents to prove your income. However, if you have only been working for a short period of time, you may be able to get approved by other lenders who only require one year of income.

How does this program work?

  • If you are a wage earner, you provide one year of your W2 or your 1099. Written or verbal verification of employment is required.
  • If you are self-employed, you provide one year of your personal and business tax returns, as well as a profit-and-loss statement covering the time period since the last tax filing. You also must own a certain percentage of the business to qualify.

#5: HARD MONEY: Qualify based on the value of the collateral

Who is this program for?

  • This program is for borrowers looking for financing based primarily off the value of the property. Information regarding income or employment is usually not necessary.

How does this program work?

  • Hard money loans are most commonly used for investment purposes where you will not be occupying the property (“non-owner-occupied”) but, rather, you will rent it out to others or fix and flip it.
  • Hard money loans, less commonly, are also available if you are looking to buy a property in which you will actually live (“owner-occupied”). In this situation, the lender must abide by Dodd-Frank and verify your “ability to repay.” For example, the lender may analyze your income and expenses to make sure your debt-to-income ratio is not too high.
  • Hard money lenders are private individuals or companies. Compared to regular banks, which focus primarily on your credit history and income, hard money lenders focus mainly on the value of the real estate that will serve as the collateral for the loan.

#6: GIFT FUNDS: Show your ability to make the down payment and pay for closing costs based on gifts from your family members

Who is this program for?

  • For practical purposes, if you do not have the liquidity to make the down payment and pay for closing costs, you will not get past the closing table. Some lenders allow borrowers to accept gift funds from family members to get past that hurdle.

How does this program work?

  • Your immediate family member (e.g., parent, grandparent, spouse, fiance, domestic partner, son, daughter) gives you funds to pay for the down payment and closing costs.
  • The gift must be evidenced by a “gift letter” specifying the dollar amount, the date the funds were transferred, and a general statement that the donor is not expecting you to repay the gift funds.
  • Some lenders allow the gift funds to pay for 100% of the costs, while other lenders require you to make a minimum contribution from your own savings, usually at least 5% or 10%.
  • The gift donor may not be an interested party in the transaction, such as the builder, developer, real estate agent or broker.
  • While gift funds are eligible for down payments and closing costs, they usually cannot be applied to reserve requirements.


Tax returns, pay stubs and W-2s are not the only path to getting a home mortgage loan. The above list of programs is not exhaustive, and some of the programs can be used in conjunction with each other. The creativity of lenders is unlimited as long as they abide by the Dodd-Frank Act’s requirement that they determine the borrower will have a “reasonable ability to repay the loan.”

A mortgage broker can help you find the needle in the haystack by contacting multiple lenders, wading through the different loan programs and getting down to the nitty-gritty of the particular guidelines. The ultimate result is matching you with a lender who concludes you have the “ability to repay” based on less traditional documentation.

Continue exploring our “Bank Turndowns” series:

PREVIOUS: Was your business loan application denied? (Volume 2)

NEXT: What are some alternative ways to qualify for a commercial real estate loan? (Volume 4)

To access all the volumes in this series, go to our “Series” page here.

David A. Krebs is a licensed mortgage broker offering commercial and residential loan programs beyond your regular bank. Call us at 321-239-2781, click here to submit a message, or click here to book a free consultation. 

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