If you fall outside of the standard guidelines to obtain a conventional mortgage today, it can be difficult to find probable lenders. Most big name lenders stick to the Qualified Mortgage Guidelines which means you fall within the norm of verifiable income, good credit, decent reserves, and low debt ratios. Today, however, not everyone falls into those conventional guidelines, especially the self-employed, which makes up a large portion of today’s economy. People were forced to figure out a way to make a living outside of the traditional employer when the bottom fell out of the economy. Now these business owners wish to own a home, but are having difficulty verifying their income. In the last few years, stated income loans have made a comeback for this very reason, but there are still certain income guidelines you must follow.
How Tax Returns Hurt Borrowers
The borrowers hurt the most by the new Qualified Mortgage Guidelines are the self-employed, especially small business owners. These are the people running Mom and Pop organizations in order to provide for their family and the people that have to write off everything possible on their taxes in order to minimize the amount they pay to Uncle Sam. The problem is that when an underwriter gets a hold of those tax returns and sees the number of write-offs, their income is diminished and their debt ratios are extremely high as a result.
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This is the very reason that stated income loans came back – to help the little guys. It is no longer about lying about your income; it is about verifying it in an alternate way, which is why many lenders choose to call the program alternative income loans or something along those lines. Borrowers are not making their income up – they are simply providing alternate documentation, typically in the form of bank statements.
Bank statements are an honest way to show the cash flow of a household. It will show the money that comes in as well as the money that leaves. This will give the lender a good idea of what the borrower can afford. If exorbitant amounts of money are leaving on a monthly basis, questions will be raised. On the other hand, if not enough money is coming in that balances out what is being stated on the application, red flags are raised and the loan does not go through. It’s as simple as that.
Because non-QM or stated loans put the bank at risk because they are responsible for keeping it on their own portfolio since it does not pass the standard QM guidelines stating that the borrower can undoubtedly afford the loan, banks have to be choosier about who gets the loan. It is not the stated income loans of years past where anyone could write anything down and get approved if they had the credit to get them the loan they wanted. Due diligence is still occurring; it is just in a different way, giving entrepreneurs a chance to become homeowners again.