Lenders thus rely heavily on income tax returns for recent years, just as they do in qualifying the self-employed. They assume that any errors will be in the direction of understating rather than overstating income. To verify that you have given them your real returns, however, they require that you authorize them to obtain copies directly from the IRS. They may also ask for an update since the most recent tax return.

Ordinarily, the only investment income that is usable in qualifying for a mortgage is interest and dividends. Realized capital gains are viewed as too volatile to rely on. Funds obtained from liquidation of assets don’t count either because it is assumed they will run out.

In principle, lenders should accept investment income from any sources so long as the total is demonstrably stable. In practice, the loan officer or broker you deal with may not have the knowledge or the patience to handle complicated cases. Borrowers who are confident that they have more sustainable income than lenders will credit them for may take the path of least resistance, which is to qualify without full documentation.

If the borrower qualifies using "stated income", the lender will accept the income the borrower states. The price is usually about ¼ of a point – one-fourth of 1% of the loan amount. This is not much for avoiding what can be a hassle.

Copyright Jack Guttentag 2003