Stated income loans carry the blame for a large majority of the housing crisis. In fact, they went away for quite a while the industry recovered. Today, however, these loans are available again. They might look different than you remember and they often carry a different name, such as Alternative Documentation loan, though. Here are five things you need to know about this loan type in order to decide if they are right for you.
Stated Has a Different Meaning
Stated income has a different meaning today than it did in the past. Years ago, you were able to secure a stated income loan just by literally stating your income. Lenders did not require you to provide any documentation to prove your income. If you had a good enough credit score, the lender would use the income you state on your loan application.
Today, lenders do the process differently. You still need a high credit score in order to qualify for the program. However, you still have to verify your income, just in a different way. Rather than providing paystubs, W-2s and tax returns, banks allow you to verify your income in an alternative way, such as with bank statements.
This works well for borrowers that work on commission or are self-employed and write off a large number of expenses as a result. No matter what program you use, lenders must use the bottom line income you claim on your tax returns. If you claim a lot of expenses, your bottom line income can be too low to qualify. With your bank statements, however, the lender can verify receipt of your income on a regular basis. With two years of statements, the lender can average your income and use it for qualifying purposes without your expenses.
A Large Down Payment is Necessary
Every bank has different requirements, but across the board, most lenders require a large down payment. Large generally means at least 30 percent of the sales price. Lenders require the larger down payment in order to reduce the level of risk that stated income loans pose. Even with the alternative verification of your income, these loans still pose a larger risk to the lender.
Sometimes, in addition to the large down payment, lenders require several months of assets in order to have backup should your commission or self-employment income decrease. Every bank differs in the amount of reserves they require, but 6 to 12 months is the general consensus with most lenders.
You can easily verify your down payment and reserve money with the same bank statements you provide for income verification. Lenders usually want to see 12 months of your bank statements in order to ensure that the money is yours. The bank will go over every deposit made in the last twelve months to ensure that it coincides with your income and is not money from an outside source to make your accounts look larger for qualification purposes.
You Need a High Credit Score
Stated income loans are risky, so lenders want to see that borrowers have a good financial history. This means that you make your payments on time; do not have collections or judgments and are not over-extended on your available credit. The actual credit score most lenders require differs. Some lenders might be okay with a 680 credit score, while others want one over 700.
If you need a stated income loan, you should start working on your credit as early as possible. Pay close attention to your credit history and the utilization of your credit. All payments in two years preceding your loan application should be on time. If you have a late payment, make sure that you get current as soon as possible. In addition, watch how much of your available credit you use. Just because the credit is there for you, does not mean you should max it out. Lenders like to see your utilization rate (the credit you use compared to what is available) no higher than 20 percent.
Lenders will Verify your Employment
On stated income loans, lenders will still verify your employment. This is another level of protection for the lender, to help them determine you are employed. The type of verification will depend on the type of work you do:
- Self-employed borrowers – If you work for yourself, the lender will require verification from a third party, such as your CPA. Typically, a letter on your CPA’s letterhead stating the date you started your business and verifying that you currently operate the business is enough. The CPA also needs to verify that he oversees your business’ finances.
- Commission based borrowers – If you work for someone but receive commission rather than salary, a standard Verification of Employment suffices. Most lenders accept a written VOE form or over the phone verification with the employer.
In some instances, a lender may allow you to provide your business license as proof of your employment; however, a second verification can help your case.
Not Every Lender Offers Stated Income Loans
Before the housing crisis, many lenders offered stated income loans – they were very popular. Today, thanks to the Dodd-Frank Act and other government regulations, the loans are less common. In order to qualify as a Qualified Mortgage, which provides the lender and the borrower with many protections, lenders must fully verify income. Since that defeats the purpose of the stated income loan, most lenders do not offer the program.
However, the lenders that do offer it are the lenders that keep loans on their own books. The Dodd-Frank Act pertains to loans that sell on the secondary market. Lenders that hold loans themselves, however, do not need a secondary market and therefore can get around the Dodd-Frank Act rules. If you want a stated income loan, you should focus on smaller banks and lenders not specifically in your area. There are many lenders out there, but it requires some shopping around in order to find one that will offer you the type of loan you need.
Stated income loans are still available and can offer the large number of people that are self-employed a mortgage once again. Just make sure that you understand that there is still plenty you have to verify; it is just in an alternative way. When you shop around for lenders that offer this program, make sure to ask about their requirements. This way you know that you are able to meet them before you settle for a lender. This way you know all of your options and can secure the mortgage you need.