Stated loans were all the rage going back about 10 years. Anyone with good credit could basically state their income and secure a mortgage. That is not the case any longer today. The housing crisis along with the Dodd-Frank Act and the Ability to Repay Rule put an end to any type of stated income loan. However, more and more lenders are thinking outside of the box and offering more loans to people who would not qualify for a standard, conforming loan. The Dodd-Frank Act and the Ability to Repay Rule really made it difficult for borrowers who do not have straightforward income or employment to buy a house, which ended up hurting the housing industry. Today, you can find a variety of loan types, including those where you don’t fully document your income.
Stated Loans are Now Alternative Documentation Loans
You will probably not find any lender who offers stated loans. This is mostly due to the bad rap these loans obtained. No lender wants to be tied to this type of loan any longer. You will find them under different names, though. These names include Alternative Documentation Loans and Bank Statement Loans. Essentially, the names all mean the same thing. Borrowers do not verify their income in the standard fashion, but they do still verify it. There is not a loan available today that does not in some way verify your income to ensure that you can afford the loan.
How Alternative Documentation Loans Work
The new “stated loans” work differently than what you might be used to seeing. You cannot just have great credit and state the rest of your financial profile. Instead, the lender will accept alternative documents to verify your income. This works well for borrowers who are self-employed or work on commission. If your income is not consistent and you cannot fully verify it with paystubs and/or your tax returns, the lender can accept other forms of verification.
The most common form of verification is your bank statements. Whether you use personal or business accounts is up to you. It is very important that you differentiate between the two, though. If your funds intertwine too much, the lender cannot tell which is which and will not run the risk of double counting your income. Make sure to keep your business income in one account and your personal income in another. When you apply for a mortgage, you can then choose which account you will use for verification purposes.
The lender will look at your chosen bank account and look for consistent deposits from your place of employment. This could mean your employer if you work on commission or your own company if you are self-employed. The lender will likely request 12-24 months’ worth of bank statements to determine how much income you receive and when.
How Stated Loans Help Self-Employed Borrowers
The most common group to use stated loans are the self-employed. These people cannot fully verify their income. Sure, they might be able to provide tax returns that show the income they made, but the tax returns probably also show a large number of written off expenses. While the IRS allows these deductions, the lender must use your adjusted gross income for qualifying purposes. Many people show a loss on their tax returns when they own their own business, which would obviously leave them without the ability to secure a mortgage.
Using bank statements to verify income helps a self-employed borrower show that he does make money and even shows receipt of the money in their own account. This way the bank can gauge the likelihood of your ability to repay the loan based on the income you bring in consistently. Typically, the lender will take an average of your income over the last year or two. This way it accounts for all of the ups and downs your income takes. Using the average ensures the lender that they do not approve you for a mortgage payment that is beyond your capabilities to pay during the months when your income might see a downward spiral. This is especially important for businesses that have peaks and valleys depending on the season.
Finding a Lender
Honestly, the trickiest part of the process is likely finding a lender. In the last few years, more lenders have jumped on the stated income bandwagon, but you still may have to search. You should probably avoid larger, commercial banks, as they stick with loans that can pass the Dodd-Frank Act with flying colors for fear of being penalized. The smaller banks whether in your local area or outside of it are more likely to offer what they call portfolio loans. These are loans they keep on their own books. The same lender funds and services the loan – they do not sell it to someone on the secondary market. This way the lender can make up his own rules and determine who should qualify for the loan. They do not have to answer to anyone else. However, they do have to make sure the loan passes the Ability to Repay Rule. Every loan must pass this in order to ensure fairness to everyone involved.
Stated loans are still around; they just may look a little different today. Once you find a lender who offers them, make sure to keep looking. Getting three quotes on this type of loan should help you find the best interest rate and closing cost deal. You will likely find that interest rates are higher on this loan just because of the risk level they provide. Shopping with different lenders can help you secure the lowest rate, though. Don’t assume you have to take a very high interest rate because no one else will offer the loan. Keep talking with different lenders until you find one that suits your needs. Lenders are slowly learning to stretch out of their comfort zone in order to manage the demand for this type of loan.