What is a stated income loan or stated income mortgage? How is it like a no doc loan or full doc loan? Why we can help you if you are looking for a stated income lender.
Below we will explain the differences, will provide some guidance on how to find stated income lenders and stated income loans in your area.
Many people used to call stated income loans or mortgages “liar loans”. The credit score requirements were not very strict and the LTV or loan to value ratios were flexible. However, today that is not necessarily the case.
Under normal circumstances, you would have to provide income documentation for your mortgage. A stated income
mortgage loan requires you to STATE what your income is on the mortgage application but does not require that you prove it. Meaning, you do not show W2’s, pay stubs or tax returns. Banks’ underwriters will look at the type of employment or business a borrower is in and will compare the stated income
against a national salary or income database. If the income does not make sense, then the loan can still be denied by stated income lenders. For example, if you are a barber and you claim to make $750,000 per year…then that will most likely raise a red flag and will result in a loan denial. The reality is that it should never get that far. Your loan officer should guide you to providing accurate income information. It is not legal to lie on a mortgage application. In addition to simply stating the income, the banks will usually require the borrower to sign IRS form 4506 which grants the bank the ability to check your tax returns afterwards. Although it is highly unlikely that the bank will ever request copies of the returns, signing this form typically scares borrowers into being truthful on the mortgage application
as they should.
In exchange for the additional risk referenced above, stated income lenders will typically have higher interest rates for these loans. There are lenders in the northeast who provide excellent rates for stated income mortgage loans in New Jersey, and Connecticut. There are many requests for stated income mortgage loans in California and other states, but the rates are not nearly as competitive. In fact, California has big problems right now because there are many self employed borrowers there and only about two lenders who are into the stated income lending business.
Who are stated income mortgage loans meant for? For the most part, this loan is for the self employed borrower who cannot document all of the income or shows a very low net income on the tax return. In addition, a stated income mortgage loan is great for a person who earns some salary but also cash that is not documented anywhere. An example would be a waiter, bar tender, valet parking attendant, limo driver, etc One other type of borrower who may opt for a stated income mortgage loan is someone who collects rental income but does not have signed leases to verify that income stream.
Most stated income lenders require a minimum of 40-50% down or equity in the property plus a credit score greater than 700. Some stated income mortgage lenders in New Jersey, Connecticut and Pennsylvania only require 30% down and there are no minimum credit score requirements. Stated income lenders in California may require a larger down payment and the rates will most likely be a bit higher.
Many people feel they need a no doc loan or a stated income
loan but that may not necessarily be true. You should understand your mortgage loan options
before doing anything. Then speak with a loan officer to get a free stated income rate quote
based upon your particular scenario.
The future of stated income mortgage loans and stated income lenders :
Stated income mortgage loans are making a slow comeback and it is a good thing. The lending regulations in our opinion were over-tightened. Now, you have legitimate self employed borrowers who cannot get a loan. That is a problem which needs to be fixed. If you are not going to bring stated income loans back in full force, then the full documentation guidelines need to change for self employed borrowers. They should use the gross income (or somewhere above the net) on the tax returns for qualification purposes. Salaried borrowers are showing gross income before tax deductions and so should self employed borrowers. That in alone would help to prevent thousands of foreclosures. So, we believe that over time, you will see more stated income lenders back in the game again.
The government believes that stated income loans were the primary reason for the mortgage meltdown a few years back. However, their regulations created the environment for this to happen. Even after all of that, we are seeing some lenders provide stated income loans for borrowers who are self employed. Why self employed? It is because they often have difficulty documenting their income OR they are taking advantage of the busienss friendly tax laws which results in a poor looking mortgage application (low net stated income).
There were regulations in early 2014 which penalized lenders who failed fo tully document a borrower's ability to pay their loans. In fact, mortgage originators now have to take the SAFE Mortgage Loan Originator's Test and there are questions specifically targeting the area of a borrower's ability to pay.
We believe that the mortgage lending regulations and guidelines were over-tightened after the mortgage meltdown. Now, we have a situation where self employed borrowers are having difficulty finding a loan or qualifying for a loan. They are required to qualify using their net income on their tax returns. However, since these borrowers are taking advantage of the legal tax deductions for their businesses, they often show a very low net income. Meanwhile, salaried borrowers get to qualify using their gross income. Although they have to also factor other payments that may show up on their credit report such as car payments and credit card minimums, they are not showing other expenses like phone bills, fuel and other expenses that self employed borrowers get to deduct.
As a result of what I just outlined above, many self employed borrowers cannot qualify and this in turn is hurting the housing market. It is our opinion that stated income loans need to be mainstream again but for self employed borrowers only.
You may also be able to find Stated Income Loans for Investment Properties
. These are much harder to find and often the LTV requirement will be lower with the down payment higher. You can also expect the interest rate to be higher when you are looking for a stated income loan for an investment property.
The Pros and Cons of Stated Income Loans - Mortgage 101
Stated Income Construction Loans - Construction Loan Center
The Mortgage Professor - Scapegoating Stated Income Loans - Washington Post
Stated Income Ruling Regarding Bankruptcies - Bankrate