The stated income loan seems to be a thing of the past after the housing crisis that was almost wholeheartedly blamed on the stated income loans, but it is making a comeback. While you might find it a little difficult to find a stated loan for an owner occupied property simply because the Dodd-Frank Act of 2010 and the Ability to Repay Rule so strongly emphasize the fact that banks need to accurately evaluate whether a borrower an afford the loan or not, investors are not so heavily regulated. In fact, real estate investors can get a stated loan without much hassle at all as long as they have the following requirements met.
Large Down Payment
Every lender wants to cover their back when it comes to lending out money without verifying income. In order to do this, they require real estate investors to put a hefty down payment on the home. In most cases this means around 30 percent of the purchase price. That is 10 percent higher than the standard down payment necessary for a conventional loan without PMI! The reason for the high down payment, however, is to decrease the risk of default. If you have 30 percent of a $200,000 home invested, chances are you are not going to just walk away and leave your investment to fail, right?
Credit still plays an important role in subprime loans. The lower your credit score, the lower your chances become to use a stated income loan. Just as the higher down payment helps to protect the lender, so does a good credit score. A score over 680 shows the lender that you are responsible with your finances, giving them hope that you will continue that trend. If your credit score is lower, it does not mean you will not be able to get a stated loan, you just might have to shop a little harder for a lender willing to take the risk.
Plenty of Reserves
Reserves are like the icing on the cake when it comes to getting approved for a subprime loan. The more money you have on stand-by ready to pay your bills if something were to happen to your regular income, the better you will look. Lenders like to see at least 3 months, but oftentimes closer to 12 months’ worth of reserves on hand. The more you have, the more likely it is that you will get approved.
Proving your Worthiness
Proving your worthiness on a subprime or stated income loan is not impossible. What lenders want to see or will require you to show them are bank statements or proof of your assets. This is how lenders not only ensure that you make the money you said you make on the application, but also that you do have the reserves and wherewithal to make the down payment that you promised. Your assets can take the place of proving your income, therefore giving you the feeling of a stated loan without the risks that true stated loans created in the past.
All of these stipulations pertain strictly to investment properties, however. Owner occupied properties typically cannot get approved for a stated income loan unless the lender keeps the loan on its own books. An owner occupied property that does not have the income properly verified through standard channels, such as a W-2 or tax returns is not able to be sold on the secondary market because of the legal action the borrower can take should he become unable to afford the loan. Investment properties do not have this type of protection, however, and have more leeway in terms of the types of loans that can be offered. If you are trying to become a real estate investor, the stated income loan might be your best option and more and more lenders are offering them today!