Stated income loans are still around, contrary to what many people believe. These loans may not look the same as you remember, but there are still ways for borrowers that can’t verify their income the traditional way to secure loan funding.
Just how much can you borrow and how do the loans work? Keep reading to find out more.
Who Can Get a Stated Income Loan?
First, let’s discuss who can even obtain a stated income loan. Typically, it’s borrowers that are either self-employed or work as an independent contractor. These borrowers typically have irregular income and their tax returns don’t show their true income because of the large number of write-offs and deductions they can take.
There’s one other stipulation you must meet – you cannot use the loan to purchase an owner-occupied property. It is against the law to have this type of loan on a home that you occupy. The only borrowers that can use this type of loan are those that buy an investment property or second home.
What’s the Max Loan-to-Value Ratio?
Now, how much can you borrow for your non-owner-occupied property? The answer depends. Because there isn’t an investor or entity backing the loan, such as Fannie Mae or Freddie Mac, each lender can make their own rules. They keep the loans on their own books, so they can decide what level of risk they want to take.
In general, expect to need a down payment of around 25% in order to secure a stated income loan. This means a max LTV of 75%. This isn’t a hard and fast rule, though. Each lender has their own requirements. You may find some lenders that require a 30% or higher down payment and those that allow LTVs as high as 90%.
Your Qualifying Factors Play a Role
Just how do lenders decide how much you can borrow? It depends on your qualifying factors in most cases. Typically, the better qualified you are for the loan (the lower risk of default that you pose), the better your chances of approval with a high LTV.
Just what do lenders want to see?
- High credit scores
- Low debt ratios
- Good credit history (no defaulted loans)
- Stable employment
Just what this looks like will vary by borrower. Some lenders will consider borrowers with 2 years of self-employment and a 680 credit score a ‘good borrower’ while others may view that as risky. It helps to shop around with different lenders to see how each one views your qualifying factors.
The Lower the LTV, the Better the Terms
No matter how much a lender will let you borrow, it’s important to know that the more money that you put down, the better loan terms that you’ll receive.
Just what does this look like? The terms on your loan pertain to the interest rate, term length, and closing costs. The less money you put down on the loan, the higher risk of default that you pose to a lender. This means that the loan will likely cost you more money in the form of the interest rate or closing costs.
Lenders base your interest rate and closing costs on your likelihood of default. When you put more money down on a risky loan, such as a stated income loan, you lower your risk of default. Why is that? It’s because you invest your own money in the home. If you were to walk away from it, you’d lose your own investment. If you put down $5,000 for example, it may be easier to walk away from the home. If you put $30,000 down on the home, though, it may be much harder to walk away. The chances are that you’ll find a way to make the payment and avoid loan default.
The maximum LTV you can borrow on a stated income loan depends on the situation and the lender. Do what you can to maximize your qualifying factors including the down payment, especially when you need a stated income loan. Also, shop around with several lenders to make sure that you find the loan with the best terms for you.