What's Not On Your Credit Score: Income

When applying for any type of loan or credit, you will have to include your income. Something to keep in mind is that your income will never go "on your credit report" or affect your credit score. You can have a very high credit score and low income, or high income and a very low credit score. The two are mostly independent (although it's probably easier to take the actions necessary to get a high credit score, i.e. minimizing your debts, if you have a high income).

But your income can feel like it's part of your credit score when you're applying for a loan. Sometimes it can be a bigger determinant of the outcome than your credit score! Even if you have a really poor credit score, if you've got a sky-high income and you can document that income, you will be able to get some kind of loan (although it will be at a high interest rate). Conversely, if you have a great credit score and a low income, most lenders will find it quite easy to turn you down.

This gets more important when applying for mortgages. Most mortgage lenders will require you to document your income. They might require anything from check stubs to your tax returns for the past 2 years. However, if your credit score is high enough, you can get a no-documentation loan, aka a "stated income" loan.

I was fairly amazed (and grew to appreciate the value of a good credit score) when I was thinking about buying a rental property last year. I walked in to the bank (a very large, national bank... you've definitely heard of it) and the mortgage guy checked my credit score. This bank used the median score out of the three; since my median score was above 750, I was pre-approved for more than twice what I was thinking of spending with a 5% down payment and no income documentation. In the words of the banker, "If your credit score's that high, we'll believe you when you tell us what your income is." That statement made my jaw drop.

Of course I told him my correct income, but since I'm an independent contractor who's reimbursed for lots of stuff, my "income" is unusually flexible. If you looked at the checks I get every 2 weeks, you'd say my income is X; if you looked at my final net income on my tax returns, you'd say my income is more like 0.6*X or maybe even X/2. A more realistic view would say that my "income" (as most people would figure it) is about 0.8*X. On a stated-income loan, I'm able to use this more realistic figure rather than the understated income on my tax return.

I am not suggesting that you lie on a loan application, and I'm not saying that I've done so or are even thinking of doing so. I think that would be very dangerous. But, at the same time, I appreciate the flexibility that I now have when it comes to mortgages. The whole process becomes much easier. I get to skip a bunch of forms and paperwork that I would normally have to fill out. I get to give the bank a more realistic (yes, higher) view of my income. And I wouldn't be able to have this flexibility without an awesome credit score. And I'm happy to tell you how to achieve that.