Stated income loans might seem hard to come by today, but that is only because their name has changed. Rather than stated income mortgage, they are now oftentimes called alternative documentation loans or even bank statement loans. These loans are typically reserved for self-employed borrowers that cannot fully document their income, but they can also be used for borrowers that work on commission, bonus, or those that cannot fully document their income in the standard way. The difference today with stated income loans versus how they were 10 years ago is that borrowers still have to verify their income in some way – the option to have a “no doc” or “no verification” loan is a thing of the past. Lenders can no longer take your word for what you make based on your excellent credit score alone; they need proof.
What Type of Work can you Do?
There are no guidelines determining what type of employees can qualify for stated income loans. In general, however, people in the following professions use this program:
- Self-employed borrowers that do not draw a salary
- Employees of a company who work on 100% commission
- Employees of a company who work on a small salary and a majority commission
- Employees that work overtime and/or on a bonus structure
Honestly, you can do just about anything as long as you work and can prove it. If you do not have standard paystubs to show your regular income or your income fluctuates quite a bit, bank statement or stated income loans are a great option.
How do you Qualify?
That being said, just being self-employed or working on commission is not enough to qualify you for the loan; you have to meet certain other requirements. Because this is not a regulated program, such as FHA or even conventional loans, every lender has their own requirements. Across the board, stated income loans do not meet the Qualified Mortgage guidelines because one of the requirements of QM is that income is fully documented. Since you are not fully documenting your income with this program, you instantly fall out of the QM realm. This means the lender can make up their own guidelines as long as the loan meets the Ability to Repay Rules.
The Ability to Repay Rules state that the lender did its due diligence in determining that you could afford the loan, no matter how your income was verified. If the lender uses bank statements, they need to use an adequate number of bank statements to determine an average income, given the rise and fall of your income throughout the year, to ensure that the new mortgage payment will not put you in jeopardy at different parts of the year. As long as the Ability to Repay Rules are met, the loan can close – it just cannot be sold to or Freddie Mac; most lenders keep these loans on their own books.
Typically, lenders look for a variety of compensating factors to ensure that you are a good risk. These factors include:
- Great credit scores – A score above 700 is usually desired, but every lender will differ in what they allow. The higher your credit score, the greater your likelihood of getting approved.
- Large down payment – The average down payment required is 30% of the sales price of the home, but every lender differs. In any case, the more money you put down on the home, the greater your chance of getting approved.
- Reserves on hand – Most lenders like to see at least 12 months’ worth of reserves in a liquid account to use in the event that your income were to become unavailable, enabling you to still make your mortgage payments.
- Low debt ratio – The lower your debt ratio, the more likely you are to get approved for the program. There are no exact maximum debt ratios across the board; every lender has their own threshold for what they will accept.
Look at your Options
If you are a self-employed borrower that has tax returns that show an income, consider talking to a lender about a fully documented loan. You will not know the amount of qualifying income they will use until they evaluate your income. Some lenders add certain expenses back into your net income reported on your tax returns, making your qualifying income higher than you anticipated. The most common expenses to add back are depreciation and depletion. Some lenders will also add large expenses that are considered a one-time expense, if you can prove that they do not reoccur.
If you cannot qualify for a fully documented loan, shop around with banks that offer stated income loans. If you shopped with 3 different banks, chances are you would find 3 different programs available to you. Some lenders have a minimum down payment requirement that is higher than others, while other banks have a lower threshold for high debt ratios. Whatever the case may be, you need to shop around and compare the different programs you are eligible to receive. In addition, every lender will have a different interest rate that they offer – some will be higher than others, so know what you are getting yourself into.
When you compare the loans, do not just compare interest rates, though; make sure you compare the fees charged as well. You can determine which is better, taking higher fees or taking a higher interest rate after you determine how long you plan to stay in the home. If you take the higher fees, you can determine how long it would take you to break even on those fees with the money you would save on the lower interest rate to determine if they are worth paying or not. In the end, you can always refinance down the road, once your income is more stable and you are able to fully document it, if the interest rate you are given is too high to handle for the term of the loan.