Stated income loans do still exist despite the common belief that they went by the wayside. You may hear them by other names, such as ‘alternative documentation loans.’ They are not the same stated income loans we know from years ago. You still have to verify your income, but it doesn’t have to be in the standard way (paystubs and tax returns). Another major difference today is the amount of assets and reserves you need in order to qualify.
Why Lenders Still Offer Stated Income Loans
You might wonder why lenders would even offer stated income loans today. After all, aren’t they the reason for the housing crisis? While no one can put their finger on what happened, it is definitely a possibility that they played a role.
Most lenders, if not all, put an end to the stated loans during and right after the housing crisis. They were too afraid to try something like that again for fear of going through default. After a while, though, they saw a need for a comeback. Self-employed borrowers and those working on commission were left without the ability to secure a mortgage despite their good credit scores and low debt ratios.
Today, the state income loans are back, just with different parameters from the loans you once knew.
First, stated income loans are kind of misleading. You really cannot state your income. You still have to prove it, which is why the alternative documentation loan is a better name for them. Rather than providing your tax returns to prove income, you may be able to provide your bank statements. Here’s why this works.
Self-employed borrowers often write off a large number of expenses. This brings their adjusted gross income down and decreases the taxes they owe. It’s a perfectly legal move, but it can hurt them when they try to apply for a mortgage. Lenders have to use the adjusted gross income when figuring out how much money you make. If your adjusted gross income is very low in order to reduce your tax liability, it could make it impossible to secure a mortgage.
Letting these borrowers use their bank statements to prove their income will allow the use of the money borrowers actually make, rather than what’s reported on paper. Borrowers must be able to prove consistent receipt of the income. The easiest way to do this is to show receipt of income around the same time each month. Whether it’s weekly, bi-weekly, or once a month, regular receipt of income makes it easier for lenders to determine your actual income.
Proving Assets and Reserves
Because stated income loans pose a higher risk to lenders than any other type of loan, they often require stricter guidelines to ensure that you can afford it. One thing they often pay close attention to is your assets. This helps lenders know how easily you can afford the loan. They can look at this factor in several ways:
- Down payment money – Just like any other loan, the lender needs to make sure you have the money available to put down on the home. Stated income loans usually require higher down payments than standard financing options. You may find that you’ll need a 20% down payment to get a loan from certain lenders.
- Reserves – Lenders also like to know that you have money left over after you pay the down payment and closing costs. Having liquid reserves means you have money that can cover your mortgage payment should something happen to your self-employment income. They determine the amount of reserves you have by determining the number of months of mortgage payments your money can cover.
The Lender Requirements
Unlike conventional or government-backed loans, there are no specific guidelines that every lender follows when it comes to stated income loans. These loans are what you call portfolio loans. In other words, the lenders providing the loans also keep them on their books. They do not sell them to investors. This allows these lenders to make their own rules.
Because lenders can set their own rules, there are not any published guidelines you can follow. It’s up to you to shop around and figure out which lender best suits your qualifications. For example, Lender A might require self-employed borrowers to have 12 months of reserves on hand while Lender B might only require 6 months. If you only have 6 months available, Lender B would be your only option.
The key to finding the right lender when getting a stated income loan is shopping around. You will likely find that most lenders require higher levels of assets and reserves, but you may find an exception to the rule as you shop around.