Stated income loans have made a comeback. But, people want to know, are the closing costs still higher? In most cases, yes, the costs on these loans are higher simply to make up for the risk the lender takes. It doesn’t have to be that way, though.
Read on to learn how you can get the lowest costs possible on your stated income loan.
Why Closing Costs are Higher
First, let’s look at why lenders usually charge more on stated income loans. It all comes down to one reason – risk.
Stated income loans usually mean the lender doesn’t verify your source of income at all. Today, though, it’s a different story. Even subprime lenders have to abide by the Ability to Repay Rule. In other words, the lender must make a good faith effort in determining you can afford the loan.
What the rule doesn’t say is how you have to verify the income. For example, it doesn’t say a lender has to use your paystubs or tax returns. If a lender keeps the loan on their own books, they can choose to accept bank statements or an alternative form of income documentation. The bottom line is they have to believe that you can afford the loan. In other words, no income, no asset loans no longer exist.
In exchange for this risk, lenders usually charge more for the loan. They may charge a higher origination fee or discount fee. They may also charge more for processing or underwriting your loan.
Think of it as a prepayment to the lender. If you default on your loan down the road, they at least made some money upfront on your loan.
It’s not Just Closing Costs That Are Higher
Don’t forget, there’s one more thing that will be higher on a stated income loan – the interest rate. Again, because lenders take such a risk, they’ll charge you more. While you do make your payments, the lender can make a profit on your interest. If you default, they at least have the higher interest payments that they made. It, of course, doesn’t make up for the money they lose on the loan, though.
Bargaining for Lower Costs
Now, just because closing costs are generally higher for stated income loans doesn’t mean you have to accept them. Lenders are often open for negotiations just like they are for any other loan. If you want the bargaining to work in your favor, you should try to make at least a few of the following happen:
- High credit score – The higher your credit score, the less risk you pose. If your score is above and beyond what the lender requires for a specific program, they may be willing to cut you some slack on your closing costs or interest rate.
- Low debt ratio – The fewer debts you have, the more likely you are to make your mortgage payments on time. Each program has a maximum debt ratio, but that doesn’t mean you should have one that high. The lower your debt ratio, the better you look to a lender.
- Reserves – Having money on hand as a ‘backup’ can help your case. Lenders count your reserves by how many months of your mortgage payment you can make. If your mortgage payment is $1,000 and you have $6,000 in a liquid account, you have 6 months of reserves.
These compensating factors, as they are known, help you negotiate lower closing costs. Lenders are more willing to take a hit if they know you are likely to make your payments on time. In fact, compensating factors can also help you negotiate a lower interest rate, making the loan less expensive overall.
Shop Around for the Lowest Closing Costs
Stated income loans aren’t as regulated as any loan falling under the Qualified Mortgage rules. In other words, each lender makes up their own rules. You are free to shop around with as many lenders as you like. It’s best if you do so within a short time period – usually 2 weeks, though. The multiple credit inquiries won’t affect your credit score more than once. The credit bureau recognizes the need to shop around for the best rate and closing costs.
Each lender provides their own program and corresponding fees. Take into consideration not only the approval you receive, but what the loan will cost over its entirety. Look closely at the APR, not just the interest rate. The APR tells you how much the loan will cost you over the entire term. Opting for a loan with the lowest APR can help you save the most in the long run.
In the end, you don’t necessarily have to pay more closing costs for a stated income loan. It depends on your situation and the lender you choose. Find a lender that is willing to work with your situation without overcharging you. If you can’t find an affordable loan, try fixing some aspects of your application to make yourself look less risky.