A stated income loan used to mean that you would state your employment and your income and the lender would take your word for it. If you had assets and a high enough credit score, that was enough for the lender to believe you. That all changed with the mortgage crisis, however. Too many borrowers defaulted on their loan because they could not afford the loan they said they could afford. That was the end of the stated income loan for quite a while. Today, they have made a comeback in a slightly different way. You can still state your income, but you will have to verify in an alternative way, rather than the lender taking your word for it.
Verification of Income for Stated Income Loans
Stated income loans today mean that you do not have to provide your tax returns, which for borrowers that are self-employed or that work on commission, is a great choice. But the difference is that you do have to provide your bank statements for the last 12 months at a minimum. Those bank statements should show the receipt of the income you claim to get from your employment. The lender will look for the following things:
- Consistent deposits whether on a weekly, bi-weekly, or monthly basis
- Deposits that coincide with the amount of money you claim to make
The lender will also verify the income from a third-party, such as your CPA. If you have someone that does your taxes and accounting for you, he can vouch for your income and the fact that you are in fact self-employed.
The difference with using bank statements versus your tax returns is that the lender will not have to take off the expenses you write off on your tax returns. Depending on the business you are in, there are certain expenses the lender will take off of the top of your income, but most borrowers write off more than the standard expenses for a business in order to decrease their tax liability. This is acceptable when it comes to filing taxes, but can hurt someone that is trying to apply for a mortgage, which is why bank statements work so well.
Another difference between the old stated income loans and today’s alternative version is that the lender will definitely verify your employment. Nothing can be assumed today as lenders need to cover themselves in the event that you truly cannot afford the loan. This means that they will verify your employment one way or another. Following are a few ways:
- Verification from your CPA as discussed above; even if the lender does not see the need to verify your income from the CPA, they need to determine that you are self-employed and have been for the length of time you say
- A standard verification of employment such as a phone call or a written form can be used if you work on commission and more than 25% of your income comes from that source
- Providing your business license can sometimes suffice for verification of your employment as it proves you have the right to be in business from your state, county, or city as necessary
In a nutshell, stated income loans are stated but with a twist – there are certain verifications that are necessary today in order to protect everyone, you included. The lender needs to prove that you meet the Ability to Repay rules, which basically means that the lender did its due diligence in determining that you can afford the loan. This helps to reduce the number of foreclosures people experience and helps keep lenders in the black rather than facing the large number of defaults they faced a few years ago.