The housing crisis of 2007 made stated income loans a thing of the past. They were single handedly accused of being the reason for the crisis and were therefore removed from the market. Since then, however, these loans have made a slow comeback for a small portion of the community. Not everyone will qualify for this niche home loan product because of its strict requirements thanks to the new Dodd Frank regulations that all banks must ensure that a borrower can effectively afford a mortgage, but many people still qualify. One of the most important aspects of a borrower for this type of loan is the credit score. Plain and simple – bad credit will get you nowhere.
Minimum Credit Scores
Since there is not any regulation regarding stated income loans, there is not one specific credit score that will qualify or disqualify you for this type of lending – it is up to each individual lender. The lenders that are willing to step out on a limb and not offer Qualified Mortgages are taking a risk because they are no longer provided the guarantees that the QM guidelines offer including the ability to sell the mortgage on the secondary market or protection from litigation from borrowers. Because of this, it is up to each bank’s discretion what credit score they consider high enough to signify financial responsibility.
As a general rule of thumb, however, most banks will not consider a stated income loan with a credit score lower than 700. The only exception to this rule would be if you had serious compensating factors to make up for the lower score and lack of verifiable income. Compensating factors in this case typically include:
- Large amounts of reserves in the bank
- A large down payment (more than 30 percent)
- Low debt ratios based on the stated income on the application that coincides with the reserves in the bank
If you wish to pursue stated income loans because you cannot verify your income in a way that will enable you to obtain a conventional loan, you need to make sure your credit is in order. If you have many late housing payments or even installment loan payments made late in the last 12 months, it is best to wait until those are at least 12 months behind you. This gives you time to increase your credit score while making timely payments in order for a lender to take your application seriously as it is very high risk for them to offer this non-qualified loan.