In the past, stated income loans required very little verification. You stated your income, proved your credit score and provided assets – this was all the lender required to approve you. Then the housing crisis happened and the stated income loans took the brunt of the blame. Most lenders refused to offer stated income loans at all. After a few years, guidelines relaxed a little and portfolio lenders started offering stated loans. Today, you can find them at a variety of lenders; however, they are a little different. You still verify your credit and assets, but this time around you will also need a Verification of Employment to qualify for the loan.
How the Verification of Employment Works
A Verification of Employment is not a verification of your income. The employer only verifies whether you work at the place you stated you worked. They can also verify your dates of employment and your position. Employers can perform the VOE verbally or in written format; it is up to the discretion of the lender. Of course, this form of VOE only works if you work for someone, such as working as a commission based employee. If you work for yourself, you will have to verify your employment with a third party.
Generally, you need a VOE if you make more than 25% of your income in commission or bonuses. This is when lenders cannot strictly use your paystubs and W-2s; they need to see your tax returns as well. If your tax returns have numerous write-offs pertaining to your job; however, it could hurt you, which is why many people use a stated income loan.
If you own your own business, your CPA can verify your employment for you. Your CPA can verify the dates he started helping you with your business finances as well as agree to the fact that you do operate the business and make an income. The CPA may also be able to verify the date you started your business if you used him from the beginning.
In rare cases, you can use your business license as your Verification of Employment. It depends on the lender you use as well as the business you own. If it is a business which requires a license to operate, the lender may be able to use it since you cannot obtain a license unless you meet all of the necessary requirements of the state or county.
Verifying your Income on a Stated Loan
Another difference with stated loans today is the need to verify your income in some form. You might not provide your tax returns or paystubs, but you have to show receipt of income. Most self-employed borrowers prove receipt of income with bank statements. As long as you have at least 12 months’ worth of bank statements to provide a lender, they can use it for proof of income. This might not be a true “stated” loan, but it is an alternate way to document your income.
The benefit of stating your income and verifying it with an alternative form of documentation is the lack of expenses you will have to deduct from your income. If lenders use your tax returns to verify your income, they have to include the expenses you write off. If you write off a lot of expenses in order to reduce your tax liability, you could harm your ability to secure mortgage approval. Instead, you can use the bank statements as an alternative form of documentation, enabling you to secure loan approval without expenses getting in the way.
Your Income Must Match the Job Description
Another way lenders protect themselves aside from the Verification of Employment is to determine if your income matches your job description. For example, if you say you are a cashier and you make $90,000 per year, the lender might get suspicious. The income you claim needs to meet the average income for the same job in your area. Lenders have ways to verify the average income for each job type, so make sure you state your income within reasonable limits in order to avoid additional scrutiny.
The IRS Form 4506
The final way lenders can verify your employment and income is by requiring you to sign IRS Form 4506. This entitles the lender to copies of your tax transcripts for the last year or two. This is not a common practice for most lenders on stated income loans, but it is a possibility. If a lender is suspicious of the amount of income you claim or you cannot show high enough deposits in your bank account to coincide with your stated income, the lender may order your transcripts. They will use these transcripts to see if you claim the amount of income you say you make or at least close to it after the expenses you deduct.
Even though stated income loans are not what they used to be, they are still a great way for self-employed borrowers to secure a loan. You might have to undergo a little more scrutiny than in the past for a stated loan, but the option is still there. Lenders just need to determine that you are not inflating your income and are unable to avoid the mortgage payment you agree to pay. The extra verifications are there to help protect you and the lender from default in the future.