If you bought a home in the housing boom years in the mid-2000’s, you may have heard about “stated income loans”. These types of alternative mortgages were often given to people who were in cash-only businesses, including many self-employed people and contractors. It’s hardly a secret that stated income loan programs are very important to millions of consumers buying homes or refinancing existing real-estate mortgages in the U.S.
Even though these borrowers had limited documentation of their income, they often were given stated income loans with low interest rates. Some of them only had their word and little else to prove their income to repay the loan. A few decades ago, these higher-risk lending options arose as stated income mortgage lenders across the country began underwriting loans without requiring traditional income documentation.
Needless to say, these types of alternative home loans were fraught with risk for the lender. But because the economy was good and there was money to be made, stated income/no doc loans were available. Times changed.
After the mortgage meltdown in 2007-2009, stated income and no doc mortgages disappeared. They were generally thought to be too risky for lenders, and some said these types of riskier loans contributed to the housing crash and resulting recession. However, whatever you might hear, stated income loans are (quietly) coming back. Here’s what’s going on:
Qualified Mortgage Loans
New regulations that were enacted after the crash require that lenders provide loans with stricter guidelines about debt to income ratios, proof of income, and no more negative amortization or interest only payments.
These types of loans are referred to in the business as qualified mortgages. Lenders that provide QMs qualify for plenty of goodies, such as the ability to sell these loans to investors in mortgage-backed securities. There also is protection against lawsuits if the buyer defaults. Thus, most regular lenders only do QM loans.
Other Options Other Than QM
However, a QM loan will not work for every borrower. That is why there are some non-bank mortgage lenders that are providing other options to certain borrowers. There are now companies that are providing stated income loans that do not mandate that you prove your income with your tax returns. These types of loans may be known as ‘alternative documentation loans’ and ‘portfolio loans.’ There are still subprime-mortgage lenders out there offering stated income loans with creative packaging.
As we note later in this article, this type of loan also is being called an ‘alternative income verification loan.’ Generally, these types of special lenders require that your bank statements show that you have the cash flow to be able to pay the loan back. Many will want to see credit scores of at least 700, but others, as noted later below, may take a credit score of 620.
New Option Related to Stated Income Mortgages
However, in 2016, there is a new cousin to stated income loans – an alternative income verification loan. Not many lenders offer this type of mortgage loan yet, but more companies may offer it soon. This loan is popular for many self-employed workers, who do not have W-2s and pay stubs as regular workers do. This type of no documentation loan qualifies the self-employed worker by using 12 months of their business bank statements as well as their personal bank statements so they can create a cash flow analysis.
The stated income mortgage lender determines the amount of positive cash flow the borrower has. Most companies also will require a profit and loss statement that lines up with the bank statements that were submitted.
To qualify for this loan that is related to the old no doc or stated income loan, you will need to have a credit score generally of 620. The maximum loan to value is 75%, so you will need to have more than a 20% down payment, at least under current versions of the loan.
Generally, you can expect to pay about 1% higher for this type of stated income loan, and it usually is designed as a five year variable rate loan. Currently, this loan is only offered in a few states, but it is expected to spread in the next few years.
What to Do If You Need an Alternative Loan
If you are going to have difficulty qualifying for a regular home loan with full documentation, you may need to go with one of the alternative loan programs offered with limited documentation. However, there are some things that you will need to do before you plan to get a loan:
- As a small business owner, you may take advantage of many tax deductions in a regular tax year. This can create chaos when you want to apply for a mortgage using your income stated on your tax return. Many lenders assume that the income does not exist if it is not on a tax return. If you are going to try to qualify for a QM loan, you should try to take fewer deductions in the two years before you get a loan. If you cannot do so, you may want to opt for a modified stated income loan as we described above. Many self-employed people are looking for no income verification loans, because it makes their life much easier.
- In the two years before you apply for a loan, you should make sure that your business expenses and income are not mixed with personal funds. For instance, experts recommend that you use a business credit card and not your personal one to buy equipment; some lenders may decide to not count that debt against your DTI ratio because the equipment is part of the business.
- Try to buy a home when you have had relatively stable income for the last two years. Most lenders understand that there are seasonal peaks and valleys in many businesses. However, most of them will not want to see you made 70% less income this year than last year.
It is harder these days for contractors and the self-employed to get loans with limited documentation, but things are starting to loosen up again. You can either try to qualify for a regular mortgage loan with ample paperwork preparation in the two years leading up to getting the loan.
Or, you can get an alternative income verification loan. You will just need to be sure to get all of your bank records in order so that your profit and loss statement matches up with your bank records.
Considerations When Financing a House with Stated Income Home Loans
Stated income mortgages used to be popular back during the housing boom. This is because stated income loans do not require income to be documented on paper to qualify for a home loan. This type of loan was very useful for people who had irregular, commission based income, or operated a cash based business.
Today, getting a stated income mortgage is more involved than years ago.
New regulations were begun after the mortgage crash. Today, even stated income mortgage lenders need to have stricter rules about your debt to income ratio, income proof and other qualifications.
There are still ways you can get a stated income mortgage, however. These loans do not require the borrower to show their tax returns and other financial documents.
Even if your lender does not verify your income in the traditional ways, you will still need to have your employment verified. If you work for a company, they will probably call your employer to verify that you are employed and have the income you claim. If you are self-employed, you will usually need to show a profit and loss statement for the year and a letter from your CPA.
One of the things that you should be sure to look at carefully during your stated income home loan application is that your job title matches up with the income you claim.
For example, if you are a doctor, it is normal to state that your income is $25,000 per month. But if you are an elementary school teacher, claiming that you make $15,000 per month will raise eyebrows. Many stated income loan applications that overstate their income will probably be declined.
Another problem with some stated income loan applications is when the lender has you fill out IRS Form 4506. This allows the stated income lender to get your tax returns for the last two years. It is not common for the lender to do this, but it can deter you from lying about your income.
Keep in mind that you will probably pay a higher interest rate to the lender. This is because the lender is taking on a higher level of risk by not having your income proven on paper. You should expect to have to pay up to .5% higher on the interest rate for a stated income mortgage.
On a related note, you may also need to put more money down on the loan. The stated income lender is taking a higher level of risk so it may want to see you put more money into the deal. Another possibility is that you will need to have a higher credit score to get the loan.