Before the 2008 financial crisis, it was relatively easy to purchase or refinance a home without having to verify your income. Although those days are long gone and traditional no-income-verification refinance loans are a thing of the past, alternative options exist that those with unsteady earnings or financial hardship can explore. Thankfully, lenders are often willing to work with borrowers in need, as both parties want to avoid foreclosure.
- No-income-verification loans have mostly vanished due to stricter post-2008 regulations, like the Dodd-Frank Act and the “ability to repay” rule, which require lenders to verify borrowers’ repayment capacity.
- borrowers’ repayment capacity.<br>Streamline refinance options, such as FHA, USDA, and VA loans, simplify refinancing without full income verification or appraisals but have strict eligibility rules and no cash-out options.
- Borrowers with irregular income, like freelancers, can consider non-QM loans, cash-out refinances, or adding a co-borrower, though these may involve higher costs or risks.
Why No-Income-Verification Loans Are Rare Today
Traditional no-income-verification refinance loans are basically a thing of the past.
Prior to 2008, mortgage lending had less restrictive underwriting standards. Lenders were more often focused on volume and profits rather than the borrower’s ability to pay. Borrowers then could state their income without documentation – making it easier to qualify for loans.
But after the financial crisis, laws like the Dodd-Frank Wall Street Reform and Consumer Protection Act introduced stricter lending standards. And the ability to repay rule went into effect, mandating that lenders verify a borrower’s capacity to repay the loan – effectively eliminating most traditional no-income-verification loans.
Two decades ago, lenders offered these loans with little oversight, allowing borrowers to inflate their income to get fast approvals, often without demonstrating income via W-2s or other proof. But these loans were overused and abused, contributing to the financial meltdown.
Lenders offered these no-income-verification loans with little oversight, letting people inflate their income to get fast approvals. With home prices soaring, banks assumed they would be safe even if borrowers defaulted. Rampant speculation in the market, lax regulation, and credit rating agencies that misjudged the risks also contributed to the problem back then. These “liar loans” exposed shaky underwriting standards, but the crisis ultimately came from financial institutions piling risky bets on top of an overheated housing market.
Government-Backed Streamline Refinances
The good news is that Uncle Sam offers a way to reclaim some benefits of those no-income-verification loans that are no longer around. Let’s take a closer look at these options.
FHA Streamline Refinance
The FHA Streamline Refinance loan is ideal for borrowers with existing FHA loans.
You don’t need income documentation or an appraisal, but you will continue paying mortgage insurance premiums – so it’s not always the cheapest option. This loan is ideal for borrowers facing financial hardship who have an FHA loan and are yearning for lower rates or payments.
However, it does not allow for any cash out if you are trying to access home equity in the refinance. Learn about FHA cash-out refinances here.
Qualifying for an FHA Streamline refinance is straightforward compared to other options. To be eligible, your current loan must be FHA-backed and at least 210 days old with six payments made, and you need a solid payment history—no more than one late payment in the past six months.
Even if you’ve had mortgage forbearance, you may qualify after making three on-time payments post-forbearance. Additionally, the refinance must offer a clear benefit, such as lowering your interest rate by at least 0.5%.
USDA Streamline Refinance
A similar option exists for USDA home loan holders.
The USDA Streamline Refinance promises a simplified process with no appraisal or credit score requirements. The focus for this loan is on lowering monthly payments. The program often waives the requirement for a new home appraisal, which benefits borrowers with declining property values. But only borrowers with an existing USDA Rural Development loan are eligible, and you cannot take cash out during the refinance.
The USDA streamline-assist is the most common type of streamline refinance and is available to most homeowners eligible for refinancing. This option simplifies the process by not requiring a full credit check or detailed proof of income and employment history.
To qualify, you must have had your current USDA loan for at least 12 months, made no late payments in the past year, and be able to lower your monthly payments by at least $50. All existing borrowers have to remain on the mortgage unless there has been a death. While income verification is not thorough, you must still prove your household earnings meet USDA income limits for your area.
For all USDA refinances, specific eligibility rules apply. Only current USDA loan holders can refinance and the home must remain your primary residence. Any second mortgages or liens must be paid off or resubordinated. Additionally, mortgages must be fixed-rate with a 30-year term, though exceptions may apply for low-income borrowers. The new loan must also have a lower interest rate than your existing one.
VA Streamline Refinance
If you are an eligible Veteran, active duty military member, or surviving spouse, you can pursue a VA Streamline Refinance, also called an IRRRL, designed to make refinancing quick and straightforward, with fewer steps involved. Most of these refis don’t require a new appraisal, saving time and money. Many lenders have no minimum credit score or income verification requirements, making it easier for more VA homeowners to qualify. Additionally, you don’t need to provide a DD-214, as your existing VA loan already confirms your eligibility.
However, the IRRRL still requires that you meet certain conditions. To be eligible, you must have an existing VA loan in place for at least seven months (210 days). A strong payment history is essential, with no more than one late payment in the past year.
The refinance must provide a clear benefit, such as a lower interest rate, reduced monthly payments, or switching from an adjustable-rate to a fixed-rate mortgage. If payments increase by more than 20%, income verification is required.
Also, this program is for “rate and term” refinancing only, with no cash-out options. A funding fee of 0.5% of the loan amount typically applies, which you can roll into the loan or pay upfront. Unlike the original VA loan, there are no current occupancy requirements, though you must certify previous occupancy of the home.
Alternative Refinancing Options for Borrowers With Unsteady Income
Are you a freelancer, gig worker, part-timer, or someone who lacks consistent earnings? Fortunately, you can pursue options that may improve your chances of getting approved for a refinance loan. Here’s a roundup of choices to consider.
Using a Co-Borrower
Adding another qualified borrower with steady income to your refinance loan application can improve your odds of approval.
The lender evaluates the combined income and financial stability of both borrowers. A co-borrower becomes equally responsible for the mortgage loan. Their income, assets, and credit are combined with the primary borrower’s to meet the lender’s qualification requirements. The co-borrower is also liable for the debt – meaning they share responsibility for repayment.
Cash-Out Refinances With Equity
A cash-out refinance allows you to tap into your home’s equity.
This loan increases the leverage of the property, allowing you to access tangible cash from the increased home value.
If you have a high amount of equity in the home, a non-traditional lender may be willing to ease up on the income documentation it requires and offer you a cash-out refinance. These are traditionally called hard money loans. Just be aware that the reason the lender is willing to lend to someone with no verifiable income or bad credit is that they can take the house and make a lot of money if they need to. Proceed with caution.
Non-QM Loans
A non-QM, or non-qualified, refinance loan is a mortgage refi option for borrowers who don’t meet traditional lending criteria and have irregular income, including self-employed borrowers. These loans, not backed by Fannie Mae or Freddie Mac, commonly use alternative means to verify income, such as bank statements, profit and loss statements, rental income, or asset depletion, as opposed to standard paystubs and tax returns.
Non-QM loans are ideally tailored for freelancers or gig workers and offer flexibility. But be aware: they often come with higher interest rates to offset the added risk for lenders.
Mortgage Modifications for Financial Hardship
If you face a legitimate hardship – such as a job loss, mounting medical bills due to a serious illness, divorce or separation, death of a co-borrower, or a home wrecked by a natural disaster – your lender may be able to adjust your loan terms with a loan modification.
This might mean lowering your interest rate, extending your loan term, or deferring payments temporarily. To begin this process, you’ll need to contact your lender as soon as trouble starts. You will also need to provide documentation like paystubs, bank statements, or medical bills to show your situation.
Steps to Take When Facing Financial Hardship
If you are experiencing financial hardship, it’s important to proactively communicate with your lender as early as possible. The lender will require documentation to support the hardship claim, which, depending on the hardship suffered, can include proof of reduced income, a death certificate, or a divorce decree.
Fortunately, there are assistance options for those who can prove a hardship, which include the following.
Mortgage Forbearance
Mortgage forbearance is a temporary relief option that enables borrowers to pause or decrease their mortgage payments for an agreed-upon period due to financial hardship. It’s designed to provide borrowers time to recover from temporary setbacks, such as a job loss, natural disaster, or medical emergency, and avoid foreclosure.
Repayment Plan
This is a type of mortgage assistance program in which a lender permanently changes the terms of a borrower’s loan to make monthly payments more affordable. This is often offered to borrowers who are experiencing long-term financial difficulties and cannot maintain their current mortgage payments but want to avoid foreclosure.
Housing Counseling
Additionally or alternatively, you can seek the help of a housing counselor – ideally a HUD-approved counselor – trained to help families and individuals navigate the complexities of homeownership during hardship.
Housing counselors offer personalized guidance to help prevent foreclosure, manage your finances, and understand mortgage options going forward.
Why Lenders Prefer to Avoid Foreclosure
Foreclosure on your home is a worst-case scenario you want to avoid. The good news is that lenders want to avoid this circumstance, too.
Foreclosures are expensive and time-consuming for lenders, so it’s often better for them to work closely with borrowers. If you are facing a hardship, your lender might agree to adjust your loan terms to make payments more manageable. This can lower your interest rate, extend your loan term, or even provide payment deferrals. But open communication is key: If you show you are willing to work toward a solution, your lender is more likely to help you keep your home.
Ready to Explore Your Refinancing Options?
Although old-school no-income-verification loans are no longer around, refinancing options are available to make it easier for you to qualify if you lack consistent income. Whether you have an existing FHA loan and qualify for a streamlined refinance, or you’re exploring alternative paths with irregular income, solutions exist to help you reach your financial goals.
If you’re encountering money challenges caused by a significant life event like a death, divorce, illness, or disaster, investigate different methods designed to help, including mortgage modification, forbearance, or a repayment plan. Help and guidance are available, especially if you seek solutions early in the process.
For additional resources on financial hardship assistance, visit usa.gov/financial-hardship to learn more about programs you may qualify for, and hud.gov/homeownerhelp to connect to a HUD-approved counseling agency.
