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What are the Fannie Mae Self-Employed Income Guidelines?

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If you are self-employed, you might wonder what type of mortgage you will be eligible to obtain. Do conventional loans even exist for the self-employed borrower?

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Luckily, they do exist. Fannie Mae has guidelines that make it flexible for those that work for themselves to secure a mortgage without having to pay subprime interest rates and/or fees.

Keep reading to learn the guidelines for this conventional loan program below.

The Basic Guidelines

Any borrower that makes more than 25% of their income from self-employment must disclose the type of business and its location. They must also demonstrate a demand for the product or service that they offer as well as show the financial stability of the business. Finally, Fannie Mae requires that the business prove that they have the capital and ability to generate future income with the business.

In order for the lender to be able to consider your self-employment income, you must have a 2-year history of receipt. If you don’t have a 2-year history, you may still be able to qualify for the loan if you are able to prove that you have experience in the industry. For example, if you left your job as an accountant to open your own accounting service, you can prove that you have the expertise to make the business work.

Typically, a lender will need to make sure that your income from the business is in line with the income you received when you were employed. In other words, if there is a drastic decrease in income on your tax returns, a lender may not be able to use it. But, if it’s close to the income you made as an employee, a lender may use it.

Verifying Your Self-Employment Income

The tricky part is verifying your self-employment income. Fannie Mae has strict guidelines regarding how you can verify it. The lender needs to be able to prove beyond a reasonable doubt that you can afford the loan.

This means verifying your income with the following:

  • All schedules of your tax returns over the last 2 years
  • Copies of your IRS transcripts for the last 2 years
  • Copies of your business tax returns unless you meet the exceptions below

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You don’t need to provide your business tax returns if you meet the following requirements:

  • You are using your own personal funds for the closing costs and down payment and not funds from the business
  • You have owned your own business for at least 5 years
  • Your personal income tax returns show increasing income over the last 2 years

The Lender’s Evaluation

Once you provide all of the necessary documentation, the lender must determine if your personal and/or business income is adequate. The lender will evaluate your personal tax returns and look at your business income or loss. This will give the lender the best idea of the cash flow you have and whether you can afford a mortgage.

The only exception to this rule is if your self-employment income isn’t your main income. For example, if you work a salaried job, but have a side hustle that you run yourself, the lender doesn’t have to evaluate your self-employment income as thoroughly as they would if it was your main income.

If the borrower doesn’t meet the requirements to waive the need for business tax returns, you will also have to supply two years of your business returns. The lender will evaluate these tax returns as they compare to other businesses in the same industry. They look for consistency and reliability to ensure that the business will continue moving forward and provide you with the necessary income for a mortgage.

Even though Fannie Mae requirements are usually much stricter than other loan programs, their self-employment requirements aren’t that strict. As long as you can prove that your income is consistent and stable, there’s a good chance you can use it for qualifying purposes on a conventional loan.

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The Dos and Don’ts of Self-Employed Mortgages

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If you are self-employed, you have to meet different requirements than the standard borrower. You probably don’t have paystubs or W-2s to provide the lender with to verify your income. Instead, you have your own paperwork, probably completed by yourself to provide the lender. As you can probably see, this is a conflict of interest, forcing lenders to ask for other documents when you work for yourself.

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Keep reading to learn the top dos and don’ts of getting a mortgage when you work for yourself.

Do Keep Careful Records

If there’s one thing that can help you as a self-employed borrower, it’s records. The more records you have, the more proof you have that can afford a loan. Lenders often ask for the last two years of your tax returns, but if you have more to provide, it could work to your benefit.

If you have an accountant or tax professional taking care of your books, you could be in an even better position. They will have a year-to-date Profit and Loss or other financial paperwork your lender may need. What you are trying to prove is that you have a steady stream of income that the lender can see rather than just a total on your tax returns.

You want to paint the picture of reliability and consistency, which careful records can do for you.

Do Start Planning Early

As a self-employed borrower, you should try to plan for the purchase at least two years ahead of time. Lenders are going to need your tax returns for the last two years. If you write off a large number of expenses on your tax returns, your bottom line will be lower than you actually make. This will work against you when you try to qualify for a mortgage.

If you plan ahead, you can minimize your write-offs for the time being. Let your adjusted gross income be higher for those two years. Yes, you will pay more in taxes, but you will be rewarded by qualifying for the mortgage you need to buy your home. Once you are in the home, you can go back to your write-offs, lowering your tax liability and even enjoying the write-offs of owning a home.

Do Pay Off Debts

Self-employed borrowers are already a higher risk than the traditional borrower. In order to make up for this risk, you need compensating factors. A low debt ratio is one of the best compensating factors you can provide.

If you have the money to pay your debts off completely, you put yourself in a better position. Of course, if you don’t have the money to pay them off in full, at least pay your debts down. Lowering your credit card debt as much as you can will help your debt ratio. The lower the minimum monthly payment is the lower your debt ratio, which puts you in a better position.

Do Have a Large Down Payment

Again, because you pose a higher risk being self-employed, the more money you can put down on the home, the better. While you can borrow as much as 95% on a conventional loan and 97.5% on an FHA loan, it’s not recommended for someone working for themselves. The lender needs to know that you have a vested interest. This way they have more assurance that you will pay the loan back.

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There isn’t a specific minimum amount self-employed borrower’s need for a down payment. The more you can put down, the better your chances of approval, though. It goes back to the compensating factors. A higher down payment means less risk for the lender.

Don’t Damage Your Credit

Pay close attention to your credit score during the years leading up to your loan application. Opening your own business can be expensive and sometimes can damage your credit. Take your time building your business and only borrow what you can afford to pay back.

If you know you did damage to your credit score, try to get it back up again. Pay your bills on time, lower your outstanding debts, and don’t overextend yourself financially. You should also avoid applying for any new credit during the year or two leading up to the mortgage application. This will help increase your credit score and show the lender financial responsibility.

Don’t Deposit Large Amounts of Money

As a self-employed borrower, your lender is going to pay close attention to your bank statements. If you do make any large deposits, make sure you have proof of their origination. For example, if a vendor owed you a large amount of money and they finally paid you, don’t just deposit in your account and not keep a copy of the check from the vendor and the deposit ticket.

Lenders are going to see the large deposit, sending up a red flag. If you have proof and an explanation for the deposit, they may allow the use of the funds. If you cannot provide proof of the payment, the lender will likely exclude the funds from those you can use for the home purchase.

Don’t Become Self-Employed Right Before Applying for a Mortgage

If you are employed now but are thinking of jumping ship and opening your own business, don’t do it within two years of buying a home. Lenders want reliability and consistency, which they need two years of paperwork to determine.

Lenders need to see that you have the experience and knowledge to succeed in the business. If you start a business 6 months before you apply for a mortgage, the lender has no history to use when determining your consistency and reliability.

Two years is the ideal length of time you should be looking for self-employed for before applying for a mortgage, but if it’s slightly less, you can try if you have compensating factors as discussed above.

Getting a mortgage as a self-employed borrower isn’t impossible, but it does require more work. The better you set yourself up beforehand, the more likely it is that you will get the loan you want. Use these tips to help you situate yourself for success.

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No Doc Mortgage Options for Self-Employed Homebuyers

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Are you looking for the traditional no doc mortgage options that were available years ago? Unfortunately, they are gone by the wayside. The housing crisis put an end to the mortgage program as we know it.

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Luckily, it’s been replaced by another similar program that goes by the same name. You’ll just have to provide more verification for the loan program. It’s a good option for the self-employed homebuyer whose taxable income is much lower than what they actually make.

Keep reading to see how the new no doc loans work today.

The Ability to Repay Rule Changed the No Doc Mortgage

There’s one reason you won’t be able to find the traditional no doc mortgage anymore – it’s the Ability to Repay Rule. This rule states that the lender must determine beyond a reasonable doubt that the borrower can repay the loan. Without verifying your income, there’s no way for the lender to make such a bold statement.

So where does that leave you? For starters, you will have to verify your income. But, it won’t be in the way that you think.

Your Bank Statements Tell a Story

Rather than providing a lender with your tax returns and allowing the lender to use your adjusted gross income plus any depreciation, you can provide your bank statements.

Just what do lenders look for on the bank statements? They look for income or deposits. They want to see consistent deposits either pertaining to the date or the amount. They will ask for at least 12 months of your bank statements to ensure consistency of the income.

The good news is that your bank statements likely show a much larger amount of income than your tax returns. This gives the lender a larger amount to work with, which hopefully means you have a lower debt ratio. Keep in mind, though, the lender will take an average. Some lenders require 12 months of bank statements while others prefer 24 months in order to get a true average of your income. Either way, they end up averaging your income. This accounts for the various cycles your business likely goes through in a year.

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With the average income calculated, the lender can determine if you qualify for the loan based on your current liabilities and the amount of mortgage you are trying to obtain.

The Other Qualifying Factors

Before you get too excited, know that you’ll need some pretty hefty qualifying factors in order to qualify for this no doc mortgage, which many lenders call Alternative Documentation Loan.

For starters, you’ll need a good credit score. Just how good depends on the lender. On average, you can count on needing at least a 700 credit score to use this program, though. You’ll also need a decent size down payment. Again, the amount varies by lender. Count on needing at least 20% down, but many lenders may require more. The more you have invested in the home, the more likely you are to make your payments on time.

You’ll also need reserves available. Reserves are money you have in excess of what you use to make a down payment. The lender calculates your reserves based on the number of months of mortgage payments it covers. For example, $5,000 would cover 5 months of a $1,000 mortgage payment. The more reserves you have, the better your chances of approval.

You’ll also want to pay attention to your debt ratio. Most lenders won’t allow a DTI higher than 43%. This includes all debts, such as the new mortgage, your car payment, credit cards, and student loans. Some lenders may even require a lower DTI; it depends on their risk tolerance.

Last, most lenders will require third-party verification of your income. This could be something as simple as a letter from your CPA stating that you are self-employed. Some lenders also require a year-to-date Profit & Loss Statement to ensure that you are on target for the same amount of income this year.

As you can see the no doc mortgage isn’t the same as it was, but it’s still a good opportunity for the self-employed borrower to secure a mortgage. If you have good qualifying factors, you could be in good shape to find a loan with a lender. Remember, these loans are kept on each lender’s books; this means each lender will have different requirements. Shop around and find the deal that is the best for you.

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What Is a Good Expense Ratio for Self-Employed Home Buyers?

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In order to get a mortgage, you need to show that you are not a high risk to lenders. This means good credit, stable income, and a good expense ratio. What if you are self-employed though? How does this relate to you?

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Self-employed borrowers are at a bit of a disadvantage. They are automatically considered ‘high risk,’ because their income can be so erratic. The longer you are self-employed, the less risk you pose to a lender. However, you still need a high credit score, proof of stable income, and what a lender considers a good debt ratio.

Let’s look at the debt ratio further.

The Magic 43% Number

You’ll likely hear the number 43% pertaining to debt ratios quite often. That’s because it’s the magic number that allows a mortgage to be considered a Qualified Mortgage. Just what does that mean? It’s protection for the lender. It shows that the lender did its due diligence and did not give you a loan that made your total monthly debts exceed 43% of your gross monthly income.

Unfortunately, for some, that 43% is hard to hit. Luckily, not all lenders require only Qualified Mortgages. It’s not uncommon for self-employed borrowers to have a debt ratio as high as 45%, but that’s typically the maximum. It means that almost half of your income goes towards your monthly bills. That leaves only 55% of your income for daily living expenses and savings.

The Factors Other Than the Expense Ratio

Believe it or not, there are other factors lenders consider when deciding if you qualify for a self-employed mortgage. For starters, they look at the stability of your business. They look at:

  • How long you have been in business?
  • The stability of your income in that business (does it increase or decrease year over year)
  • What is your experience in the business like?

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The answers to these questions help a lender determine your income stability. Let’s say you have owned your business for 3 years. The first year you had a decent amount of income, but the year after that your income declined, and the year following that it declined again. This does not prove promising to a lender. They would much rather see increasing or at the very least, steady income to help ensure that you can afford a loan. Even with a 43% or lower expense ratio, if you have decreasing income, your chances of securing a mortgage are not very high.

Of course, lenders also look at your credit score. Your income shows how much you can afford, but your credit score shows your financial responsibility. What is your credit history like over the last 2 years? Do you have a lot of defaulted debts and late payments? If so, you prove risky to a lender. They want to see a pattern of paying bills on time and not overextending yourself financially.

Finally, lenders look at your assets. They want to know that you have another way to pay your mortgage should your income falter from your business. Let’s say you have a bad 3 months in your business. Do you have money to cover your mortgage payment set aside? Lenders call these reserves. They want to know how many months of your mortgage payment you can cover with your assets. This gives them peace of mind that you won’t default on your loan no matter what happens to your self-employed income.

It’s a Big Picture

Lenders look at all factors of your application as a big picture. They put all of the pieces together to determine your risk level. Just having a great expense ratio isn’t enough. You can have a low debt ratio and still have a low credit score and unstable income.

Instead, lenders want it all to come together. You might have a slightly higher expense ratio, but have a great credit score and steadily increasing income. If you can prove you have what it takes to survive in the industry you are in, a lender may grant an exception for your slightly higher debt ratio.

Just how high will a lender go? It depends on your situation. Again, looking at all of the factors, a lender will decide. Of course, no two lenders have the same requirements. Even two conventional or FHA lenders may have different requirements. They can add overlays onto what the program requires. One lender might not see a problem with taking a 45% debt ratio, while another may want nothing to do with it.

The key is to shop around and find the deal that works best for you. Don’t assume you need a specific expense ratio or you won’t get a loan. Make your other factors as attractive as possible. Increase your credit score, stabilize your income, and make sure your income steadily increases (not decreases). The combination of all of these factors can help you get the loan you need as a self-employed borrower.

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A Quick Guide To Home Buying For Self-employed Individuals

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If there’s one thing every home buyer has to face, it’s the different hurdles that need to be dealt with. But then if you’re self-employed, the struggle is even more stressful.

It’s no secret that buying a house is not a walk in the park. Everyone has to go through a long and winding road of loan applications, processes, and waiting games.

Getting a mortgage is especially harder for them and applying for a loan is only the tip of the iceberg. This is why it’s best to plan ahead and prepare for what you’re about to deal with. And although preparing doesn’t promise a 100% stress-free process, it would definitely take a lot of the burden off.

Improve you credit

If you’re self-employed, you might want your lenders to see that you have a satisfactory credit score. Lenders usually use this as a basis for approval as well as getting the best rates for you.

However, boosting your credit doesn’t happen overnight. To keep your status in check, try to keep your balances low. Continue paying your dues on time. And during your mortgage application process, try not to apply or open other credit lines and add up more debts in the process. This usually doesn’t give a good impression for most lenders.

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Organize your expenses

It’s not illegal to keep both personal and business expenses under the same account but it’s not really a good idea if you want to prove the state of your income.

Other than making a good impression, lenders tend to have an easier job in going through your expenses by keeping separate accounts for business and personal use. This also helps you deal with taxes with lesser frustrations.

Prove your ability to pay

Of course, lenders would like proof that you can carry on a mortgage in the long run. Before they grant a loan, they want to know if you can pay them back. This is why they look into your income, through necessary documents.

In cases where you’re self-employed or running your own business, they would need to verify the existence of your business by asking for proof of your business license, a letter of verification from a Certified Public Accountant or an Enrolled Agent.

Prepare the paperwork needed

Secure the necessary documents your lender might need. These would prove that you can be trusted with a mortgage.

Along with showing your business license and CPA letter, documents like bank statements, tax transcripts, and the like are usually looked into.

Look into different loan options

Try to shop for loans that you think you could qualify. You can check if you can try your luck with a traditional mortgage and see if you can score a loan.

But if you can’t there are alternative loans that cater to unique situations just like self-employed borrowers. Try to research about different non-qualified loans like stated income loans and others. Ultimately, be careful when you choose a mortgage. Weigh in your options carefully before you jump to a decision.

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Is Now the Time for Stated Income Loans?

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Is Now the Time for Stated Income Loans?

The higher mortgage rates, coupled with a tighter lending environment courtesy of Dodd-Frank, seem to act as a backdrop for stated income loans to stage a full comeback. Consumers may have been hoping for more variety in mortgages with less stringent guidelines. Liar loans, low doc loans, however they were called back then, stated income loans have quietly returned and served that purpose for a niche group of borrowers.

What’s in a stated income loan for you?»

Less Risky Stated Income Loans

Pre-mortgage crisis stated income loans lived up to their name. Borrowers state (overstate) their income and lenders skip the verification part. Nowadays, the lender has to verify the employment and assets of a stated income borrower.

One lender, for example, will review the pay stubs and tax returns for salaried employees and business and personal tax returns for the self-employed. Similar to stated income loans, bank statement loans usually require a year’s worth of bank account transactions to see if the borrower is generating positive cash flows.

These measures serve to lessen risky lending practices. For the lenders, they have to make legal representations about the loan and could face a lawsuit if they have not done the appropriate due diligence.

Lenders also have more advanced automated systems to help them underwrite loans, checking if the loan application makes sense and complies with existing regulations.

A Return to ARMs?

The problem of the past stated income loans was their features that only added risks to an overstated income. Most of them had variable rates, which would be difficult to grasp with their caps, limits, margin, etc.

Some stated income loans were option ARMs under which the borrower can pick how he/she will pay back the loan in interest-only payments, minimum payments, 30- or 40-year amortizing payments, or 15-year amortizing payments.

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The first four options called for really low monthly payments so less equity was built into the loan at the onset. Some of these loans didn’t even have down payments. This negative equity and falling home prices led to widespread foreclosures.

Stated income loans nowadays are still offered in variable rates but they also come in fixed rates. Fixed-rate mortgages offer stability and are easier to manage.

Interestingly, the current state of mortgage rates has made ARMs appealing because they offer lower rates than FRMs. They start with fixed rates until they adjust once a year. They’ve been an option for those who plan to move out or sell the home once the fixed rate period is over.

Stated Income Loans Serve a Niche

The Dodd-Frank Act ensures that the subprime mortgage crisis won’t happen again. But it has made access to mortgage credit even tighter for those who have trouble verifying their true income. These same people often apply for bigger loans.

Thus, the self-employed and the affluent turn to stated income loans as a specialized loan product for them. Alternative documents may be presented for employment verification; but higher down payments, better credit scores, and lower DTI ratios are required for stated income loans.

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Tax Hurdles and Alternative Documentation for the Self-Employed

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‘Self-employed’ is a term generally associated with anyone who doesn’t hold down an office job with regular hours. In this sense, it includes home-based employees and freelancers. To avoid confusion and to serve the purpose of this article, let’s identify the self-employed individual as someone who owns and runs their own business, in whatever that might be.

Perks of the self-employed

There are definite perks to running your own business. Whether you sell products or offer a particular service, you are your own boss. You work on your own time and are in control of every aspect of your enterprise. You can design operational processes and decide who to hire.

Profit? You get all of it of course. You are your own employer so you reap financial benefits from the money that the business makes.

Tax hurdles and such

Being self-employed may prove advantageous in most areas. However, this isn’t usually the case when it comes to financing a home purchase. Income verification is an essential step in the underwriting process. The lender seeks to find out if you have the financial ability to repay the loan based on the supporting paperwork. A tax form is a document that gives the underwriter an insight as to what your income is really like.

Submitting tax forms can be tricky when you’re self-employed. Normally, taxpayers have a tendency to maximize their deductions. This strategy doesn’t work well for business owners or freelancers because more deductions mean less income. And less income may reduce your chance of being approved to borrow a specific amount of money.

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What options are there?

There are a number of ways to get around the dilemma above.

  1. Leave some deductions on the table

To better your chances for a home loan, leave some of those business-related expenses on the table. Not declaring each and every bit of cost incurred in running your business keeps the income stated on your tax form within a reasonable amount. Find information for filing taxes as a self-employed individual here.

  1. Look into home loans requiring alternative documentation

Barely verified mortgage applications are a thing of the past. But some lenders are offering alternative products to the self-employed borrower. Collectively, they are known as non-qualified loans. Unlike traditional loans, these financial products are more flexible when it comes to paperwork. In some cases, little to no down payment is required.

One product in particular, the stated income loan, allows you to put down your income on the application form but doesn’t necessarily request tax forms and paystubs.

Browse through this website to learn more about stated income loans. Or talk to one of our lenders.

Homebuying 101: Preparing the Paperwork

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When you talk about a loan application, you get babbled. Different lenders require all sorts of documents needed to begin the loan process.

While one lender may differ from another in terms of verification documents, it helps to know that there are certain papers that are common to each. Preparing these ahead will not just save you time, but money and effort.

 

Gather these necessary documents before you apply for a loan:

Proofs of Income

Most lenders will require the most recent W-2 form together with your tax statements. However, some may ask for W-2 copies of the most recent two years.

If you are receiving a paycheck from your company, a W-2 will show how much your income is and the portion of it that went to tax. If you have a business and are employed at the same time, expect to provide copies of your 1099. This will report the different incomes you receive in a year other than your salary. More importantly, these verify the  earnings that you have declared upon applying for a loan and reflects your income trends. These figures will then be calculated by lenders to determine if they should approve the loan or not.

Don’t to go through paperwork? talk to a lender about your stated income loan options»

Federal Tax Returns

The recent two years of your tax returns will also be reviewed. You will have to expect to include all the schedules and K-1’s if it applies. This is important for self-employed borrowers who cannot provide W-2s.

In a stated income loan, it may not be required that you provide proof of your income such a tax return. Providing these, though, if you have them, will strongly suggest to a lender that you are ready to have your income and assets be examined. This may likely increase your chances of approval especially if they find out that you have more than enough reserves.

Credit Reports

Most loans require that you submit a copy of your credit report. Even if lenders may perform their own credit checks and each one has its own minimum credit score requirement, it is beneficial to know your credit score in advance.

By doing so, you will be able to detect any areas that need credit repair before your lender scrutinizes it. You may need to pay off some missed payments, get current on your existing loans, or trace up some fraudulent transactions done under your name. These extra steps may mean the difference once your loan provider takes a look at your credit report.

Anyone applying for a stated income loan needs to have stellar credit scores. If you provide one that’s already blemish-free (thank yourself for doing the necessary repairs in advance!), these lenders will likely approve your application.

Bank Statements

Your lender would want to know your reserves. Expect them to ask for a copy of your bank statements; the most recent and, possibly your old ones too.

Prepare copies of savings accounts, retirement accounts and deposit transactions among others. This will not only show how much money you have in the bank. It can also prove that your down payment was not a gift from non-borrowing household members.

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List of Other Assets

Aside from your bank statements, you should prepare a list of your other assets as well.

This will serve as evidence that you have enough savings and investments to keep you afloat after paying for any down payment, monthly premiums and closing costs. QM or stated income loans alike, the more money you have, the better chances that a lender will be willing to lend. If you will be able to provide these documents, you will have proof that you have other sources of income aside from your loan. If you are an investor with a huge asset, this will work to your advantage.

 

Final Words

True, paperwork takes so much time to do and, sometimes, it gets frustrating. It may sound silly, but these records will help not just the lenders but you in many ways. For one, it helps determine if you would be able to afford the loan or otherwise.

QM lenders may require you more documents but it is for sure that the ones listed above will be part of it. In a stated income loan, however, an income verification is not necessary as this loan is what it is known for. You will only have to declare how much your income is and will be taken for your word. Although submitting this document may increase your chances for a loan approval but it is never required. The one most important thing you will have to work on is to make your credit report as excellent as possible. This, together with a large down payment and a huge cash reserve, will have loan providers consider your application.

Shop for lenders and ask each for a rundown of all the documents they need. Take them down and compare them. See which ones are easier to comply and which works for you best. Start shopping for lenders today!

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For the Self-Employed Borrower: Getting that First Mortgage

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A couple of years ago, the self-employed borrower’s chances of getting a loan were nil. Today, the odds have decidedly improved. Good economic conditions have paved the way for low mortgage rates. The same has also encouraged investors to take on loans from individuals with limited documentation.

Government-sponsored agencies that back loans are also taking an inclusive stance when it comes to self-employed borrowers. In July, Fannie Mae issued new guidelines that pertained specifically to self-employed income.

Combined, these create conditions favorable for business owners and freelancers to buy a house.

Are you ready for your first mortgage? To clue you in, here are the different phases you can (and should) go through.

Phase 1: Research

There’s no surefire way to get that home loan. However, there are things you can do to up your chances for approval. The right information makes for an empowered borrower, particularly one with your circumstances. These guide questions can help make research easier.

What loan options are there?

Being self-employed, standard loan products may not be applicable to you. Now that doesn’t have to be a drag because alternative loans come in varieties too. There’s the stated income loan that allows you to indicate your income on the application form, without the need to furnish tax records and paystubs. A bank statement loan allows income verification via the activity on your accounts, as indicated by your bank statements. Read up on the guidelines for these so-called ‘alternative loans’ so you’ll know where your borrower profile fits best.

»You could also ask the experts here.»

How do I go about in choosing a lender?

Knowing what loan products you can qualify for streamlines your search for a lender. Focus on the ones in your area that cater to the self-employed clientele. You can find them online or through recommendations from family, friends, or colleagues. Be sure to compare rates and fees.

Phase 2: Application

Phase two starts after you’ve selected a lender. Applications can be done in-person, online, or via telephone. It’s highly recommended that you go and fill out the form at the lender’s office. This way, you get to meet the loan officer and ask questions. Applying for a loan is an important step so you need to know exactly what you’re getting into.

On the form, you’ll be required to give information about your annual income, savings, debts, and employment history. Once completed, this is passed along to an underwriter.

Phase 3: Processing

The underwriter is the person responsible for reviewing your application, ensuring that you meet the requirements set forth by the bank or private lender. When needed, you may be requested to provide some type of documentation to substantiate the data on your application form.

Keep in mind that you could qualify for more than one loan type. Thus, it’s best to have all relevant documents ready in case they are needed. These include but are not limited to the following:

  • Federal income tax returns
  • Credit reports
  • Bank statements
  • Documents showing the viability of a business (if applicable)

If your application has passed the review after underwriting, it will then be issued a “Clear-to-Close”.

Phase 4: Closing

The legal transfer of ownership takes place during this phase. This is when you are required to pay for the down payment and other necessary fees that come with the purchase.

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Why Stated Income Loans Appeal to Investors and Big Earners

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There’s this popular notion that loans are a means for most people to afford something. Individually, they lack the financial capacity to pay for a ‘big ticket’ purchase in cash. For instance, a member of the working class doesn’t make millions in a year so he has to get a mortgage to buy that first house. Now, this might have been true in a decade ago. Today, there is a loan product that appeals to the really well-to-do. Introducing stated income loans, a unique way for the rich to expand or maintain wealth.

What Draws Big Earners to Stated Income Loans?

Most loan products out there require the borrower to provide detailed documentation of his/her income sources. A stated income loan is not as exacting. This feature appeals to big earners who either have trouble keeping track of their various income pools or would rather not disclose how much they actually make. The fact that this loan type does not require written verification of income and tax returns gives them a sense of security.
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Apart from having lesser restrictions, the guidelines of a stated income loan are more easily met by those in the upper classes. Without the need for extensive documentation, lenders need another way to reduce a borrower’s risk of default. The solution is to require excellent credit scores, plenty of cash reserves and a down payment that ranges from 35 to 50 percent. The average borrower, still in the process of clearing credit card debt, is not a candidate for this.

Finally, big earners and high profile investors aren’t looking for a 30-year loan term. They want something they can pay off in a short span of time. A tech mogul from Silicon Valley doesn’t want to pay for his new mansion in cash. He could use this particular loan to retain a portion of his own capital and use it for other investments.

The Options

Lenders are packaging stated income loans in a variety of ways to better serve the needs of a wealthy clientele. Some companies offer jumbo mortgages for borrowers with a 55 percent DTI. Others allow interest-only payments. These plans are especially attractive to high earners. Normally, they get the bulk of their income from those company bonuses or commissions handed out yearly or every quarter.This arrangement allows borrowers to make larger payments when they have more money. The rest of time they can make do with minimum payments.
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