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The Real Reasons to Use an Alternative Documentation Loan

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You don’t need perfect credit or a W-2 to secure a mortgage. Alternative documentation loans allow some flexibility in qualifying for a mortgage.

Read on to see what options may be available to you.

What is an Alternative Documentation Loan?

The exact definition of an alternative documentation loan depends on the lender. There aren’t any regulations or requirements for this type of lender. It’s not your A-paper or subprime loans. It’s somewhere in between. It’s a straightforward loan with the same benefits as any other loan. The difference is in how you qualify for it.

The Characteristics of an Alt-A Loan

There are many different ways you can get an Alt-A loan. With any Alt-A loan, though, you don’t provide the same documentation as a full documentation loan. In a full doc loan, you would provide:

  • Pay stubs
  • W-2s
  • Tax returns
  • Bank statements
  • Employment verification

In an alternative documentation loan, you won’t provide all of that. You might provide some of it, though. It depends on the program.

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Instead, you’ll provide what they call “limited documentation.” Maybe you have a job that has variable income. You might qualify for the loan based on your assets alone. You’d be a good candidate for this limited documentation loan. Rather than providing W-2s and tax returns, you might just provide your bank statements.

Who Qualifies for an Alternative Documentation Loan?

Every lender has different requirements. There isn’t a blanket policy for every bank. One bank might require a credit score over 680. Another might allow scores as low as 620. It’s impossible to know unless you apply with various lenders.

The real question is who would benefit from this type of loan? Following are the most common borrowers:

  • Self-employed – These borrowers often have inconsistent income or claim a lot of expenses on their tax returns. Qualifying with full documentation probably wouldn’t occur. Even though the borrowers can afford the loan, it doesn’t look that way on paper.
  • Borrowers without a job – Some borrowers have enough assets to afford a mortgage, but don’t have employment. Without employment and a constant cash flow, it could be hard to secure a new mortgage. Alt-A mortgages can help work around this issue.
  • Borrowers with less than perfect credit –Credit history issues might prevent standard lenders from approving your loan. This might make the Alt-A loan a good solution for you. These lenders make up their own rules and can often work around issues as long as they aren’t housing related.
  • Borrowers that need a high LTV – The more you borrow, the riskier you become. FHA loans do allow LTVS up to 97.5%, but you still need straightforward income and decent credit. Combine either factor with a high LTV and you have a recipe for trouble. Alt-A loans can work around this issue.

Prepare Yourself for Higher Rates

Don’t be alarmed if you pay a higher interest rate for an alternative documentation loan. It’s the tradeoff for more flexible requirements. If you want a lender that requires perfect credit and straightforward income, you can have the low rates. If you need concessions, the lender is going to charge you for it.

This isn’t to say you’ll pay excessive interest rates. It depends on the situation. As with any other loan, shop around! Don’t settle for the first approval you receive. Make sure you comparison shop. This is especially important because you have a unique loan type. You aren’t looking for a Fannie Mae or FHA loan. Each lender will have their own program.

If you think you don’t fall under the “a paper” loans, consider alternative documentation loans. More and more lenders offer them today. As the number of self-employed borrowers increases, the need for this type of lending increases.

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Income Matters: How Much Is Required to Qualify for a Mortgage?

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Forget down payment for now. When you plan to get a mortgage, one of the very first things to consider is your ability to repay this debt. That’s why, verification of income on all mortgages, stated income loans included, is an essential step to get approved for the mortgage.

Lenders primarily want to know if you have a steady and reliable income to support your monthly payments. When can a lender say that you are making enough to be able to afford your loan payments? How do you determine this income required for a mortgage?

Find the answer to the question below. Find lenders here, too.

Understanding Income and Mortgage

Stated income loans of yesteryears can attest to this. A decade ago, it was easy to make loans based on the borrower’s word that he/she is earning this much. The stamp of approval did not rely on any verification.

But that’s highly unlikely now. Stricter rules and policies are in place to ensure loans are safe for consumers and lenders. Today’s stated income loans, for example, may forgo tax returns, but alternative documentation like assets and bank statements will be verified.

Income’s importance in mortgage qualification can’t be emphasized enough. And how much you need in order to qualify is a combination of several factors.

Calculating Income Required for Mortgage

To determine the level of income you need to qualify for a mortgage, consider the following:

  1. Monthly housing expenses. This is what you spend on housing, e.g. mortgage payment — principal, interest, property taxes and homeowners insurance (one-twelfth), homeowners association fees — or rent.
  2. Monthly liabilities. This refers to your total monthly expenses, housing and other debt obligations such as car loans, student loans, alimony/child support, and payments on loans that you are a co-borrower to. Utilities are not included.
  3. Mortgage amount. The amount you need to borrow for your home loan.
  4. Mortgage rate. The interest that you’ll receive on your mortgage. If you are getting a fixed-rate mortgage, this won’t change throughout the life of the loan. For an adjustable-rate mortgage, the start rate will adjust periodically. You can get pre-approved to get a definite rate from the lender or shop for mortgage quotes for now here.
  5. Mortgage term. The length of time to pay off the loan. This affects the calculation of your monthly principal and interest payments.

There are online calculators that will crunch the numbers based on those variables.

Knowing Your DTI

Where does your current monthly income fit in all of this?

Lenders use debt-to-income ratio to measure your ability to comfortably take on the loan given your total monthly liabilities including housing costs as noted above and your gross monthly earnings.

To get this DTI, you’ll divide your monthly liabilities by your monthly income before taxes. Your DTI calculation may be different from that of lenders because not all sources of income may be qualified for mortgage purposes.

Nonetheless, your DTI ratio will be your guide in determining your capacity to afford a mortgage for now. Lenders and loan programs have varying standards for DTI ratios. Most recently, Fannie Mae has expanded its maximum allowable DTI ratio to 50%.

Qualifying and verifying income are two different processes and lenders are the best people to ask about their rules. Speak with one today.

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Does Adding a Co-Borrower to Your Mortgage Make Sense?

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Does Adding a Co-Borrower to Your Mortgage Make Sense?

The concept of adding a co-borrower is a common practice in the mortgage industry. It’s a practical move to share the costs of holding a mortgage or help you qualify for a bigger loan that you might not be approved on your own. In the initial or later stages of mortgaging, you can put in another name as a borrower to your loan.

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During the Application

When you ask a spouse, a friend or a family member to sign up on a mortgage with you, you are basically “pooling” all your income, assets and credit history together.

With the ability to repay rule in place, lenders are required to do a capacity check requiring traditional or alternative documentation as in the case of stated income loans. In the course of this verification, they might find that your monthly debts relative to your monthly income, as measured by the DTI ratio, is too high. If your co-borrower has a steady income (and that he/she has a lower debt-to-income ratio), it will help you qualify.

Similarly, you and your co-borrower could add your assets such as cash deposits, stocks and bonds to qualify for a loan with a bigger amount perhaps. Lenders check assets to see if these could support your closing costs, fees, and mortgage payments. There is also a reserve requirement that depends on the type of property you are buying.

To be clear, a co-borrower with a stellar credit will help you qualify and possibly get a lower rate only if you have a fairly good credit record yourself. Lenders will consider the lower of the two credit scores and if your score falls further behind, it won’t help in your application.

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During a Refinance

You can refinance to add a co-borrower to the loan. Just like when applying for a new mortgage, you and your co-borrower go through the verification process anew, income, assets and liabilities and credit history be under review.

Adding a co-borrower to an existing mortgage through a refinance is different from adding him/her to the title deed of your house. Except when he/she is related to you by blood or a spouse, a mortgage co-borrower does not have a security interest in the property although he/she has to pay back the loan with you.

Without a Refinance

You can skip refinancing and add a co-borrower to the mortgage but only to a certain extent. For instance, you add someone to the mortgage to put into writing his/her promise to pay some or all of your mortgage debt.

If your purpose is to add a child, spouse or parent, you are better off adding them to the mortgage deed, as mentioned above. They can be co-owners but not co-borrowers so they won’t have to be held equally responsible for repaying the loan.

Otherwise, you still need to refinance so you can add a co-borrower on top of getting a low rate, taking cash out of your home, shorten or extend your loan term, etc.

Be sure to ask your lender about the implications of getting a co-borrower and the options to remove him/her should there be a falling out as in the case of divorce.

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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.

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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Stated Income Loans: Know What You’re Getting Into

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Self-employed individuals usually find it difficult to qualify for a conventional loan because they lack the documentation necessary to jumpstart this particular process. Fortunately, many financial institutions are now offering alternative loan products that cater to this specific market.

The focus of this article’s discussion will be on stated income loans. As the name implies, they allow borrowers to simply state their monthly income on the loan application. Let’s take a closer look at what this actually entails.

Documentation Types

  • Stated income/verified asset loan (SIVA)

This allows a borrower to state his monthly gross income on the application form. Income verification is done by furnishing pertinent asset documents like bank statements.

  • Stated income/stated asset loan (SISA)

Allows the borrower to state both the monthly gross income as well as personal assets. In this case, providing supporting asset documentation will no longer be necessary.

With the loans above, the debt-to-income ratio will still be computed since income sources have been provided.

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Employment Verification

While furnishing paystubs and/or tax returns are not required, the lender will still subject the borrower’s application to an income verification process. His employer will be contacted to confirm that the applicant in question is indeed connected with the listed firm.

Meanwhile, self-employed borrowers will be asked to submit a CPA letter verifying the income of a self-employed client

Higher Interest Rates

If you’re approved for a stated income loan, you can expect to pay a much higher premium than you would for other loan types. This is because you’re putting more risk in the hands of the lender. The same goes for the subsequent buyer, should the loan be sold on the secondary market.

Interest rates for a stated income loan are also about 0.25 to 0.50 percent higher than conventional loans.

Eligibility

You are required to have excellent credit scores and plenty of cash reserves. Putting down a higher down payment is also expected.

“With us, a buyer has to put down at least 30 percent down instead of the regular 20 percent on a conventional loan. Many of our clients end up putting down 35-50 percent,” says Brian O’Shaughnessy, CEO of Athas Capital Group, based in Calabasas, California. “The loan also has maximum 70 loan-to-value ratio,” he adds.

The right lender can educate you further about the specifics of stated income loans.

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Alternative Documentation for Stated Income Verification

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Alternative Documentation for Stated Income Verification- STATED-INCOME.COMIf 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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Stating Income

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.

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