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What are the Pros and Cons of Stated Income Loans

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What are the benefits and disadvantages of opting for a stated income loan over a traditional financing option?

 

Most loan and mortgage programs require the borrower to undergo a tedious underwriting process.

These often come with strict lending requirements such as an asset and income verification process which lengthens the loan acquisition timeline (given the lender uses traditional lending tools).

It also leaves out borrowers who earn from unconventional income sources and have a difficult time documenting their salaries.

This is the very same problem faced by self-employed individuals, those who have very high earnings, or those who make money seasonally.

For this reason, stated income loans remain attractive as an alternative financing option for many. It offers a streamlined loan process and saves borrowers the hassle of getting the necessary documentations for the process.

But there’s more to stated income loans than offering fast money. Like any other loan option, there are also setbacks and risks that borrowers would have to consider when looking to get a stated income loan.

Let’s get to the details.

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Why get a stated income loan?

Bypasses the regular job dilemma. The problem with most traditional loans is that they expect all their borrowers to have regular incomes which is just not the case for a significant number of the borrower market.

Paystubs have become the standard basis for evaluating risk so if you’re a freelancer or a businessman, you’re in trouble. For these people, documenting a regular income is not an option. Failure to do so can make you appear as a huge risk to their investments and therefore deny your application.

Not fair. If you’re among the nontraditional income earners in the demographic, a stated income loan which only requires you to disclose your earnings suddenly becomes handy. No need to convince anyone.

You decide your own risk. While traditional loans leave the risk evaluation to banks and lenders who ask: “Can he or she afford it?” borrowers of stated income loans are left to ask for themselves “Can I afford it?” and decide the financing path from there.

You have no need to worry about your DTI ratio being too high or your utilization ratio going overboard.

Fast transactions. Because traditional underwriting process is skipped in stated income loans, stated income loans are generally faster. It’s especially helpful if you are in immediate need of finances.

What are the disadvantages of stated income loans?

High interest. To compensate for the huge risk that your lenders are taking to offer stated income loans, they charge an interest rate higher than traditional loan programs. Remember that a single point difference in interest can sum up to thousands worth of interest payments throughout the life of the loan.

If you don’t need financing so urgently, talk to your lender and see if you can agree to find another way to document your income without resorting to a higher interest loan option.

High potential for default. Traditional loan qualification standards are designed to assess a borrower’s creditworthiness. With a stated income loan, all that safety mechanism is bypassed, thereby leaving you and the lender vulnerable to the real risk at hand.

In some other cases, a real assessment of risk is the only barrier stopping an irresponsible borrower from damaging his or her finances further or from abusing financing programs.

If you are in doubt of your own capacity to measure your own risk, consult a financing professional who can help you crack the numbers and make an informed decision about whether to go ahead or pass financing for now.

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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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Stated Income Mortgages – Are They Still Available?

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Stated Income Mortgages – Are They Still Available?
Stated Income Mortgages – Are They Still Available_

Stated income mortgages quickly became a thing of the past after the Housing Crisis of 2008. Lenders were no longer accepting the “smoke and mirrors” type lending where borrowers said they made a certain amount of money, when in reality they did not and could not afford the loan. After that crisis, new loan regulations were put into place and it became much more difficult to get any type of loan, which made stated loans null and void. Today, however, they are making a slow comeback but with a different angle – they are not as easy to obtain in order to ensure that these loans are landing in the hands of the right people – the people that can afford them, but they are available to people that can demonstrate responsible use of their money and that can prove their income in other ways, rather than the standard paystub and W-2.

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Qualified Mortgages

The end of the stated income mortgages came about when Qualified Mortgages became a big deal. QM loans are those that are offered to borrowers that can show without a doubt that they can afford the loan being provided to them. Loans that fall under this category have certain characteristics that show your ability to repay the loan. In general, these loans have a debt-to-income ratio lower than 43%, show adequate assets/reserves, and have a great credit score, which means above 700. In addition, these loans do not have periods of interest only payments; balloon payments; or any type of negative amortization – they are straightforward 15 or 30-year loans with standard amortization. These loans cannot have a term that is longer than 30 years or have upfront costs for the loan that are excessive. These loans were the only mortgages seen on the forefront of the lending industry for a while, but this excluded a large portion of the economy as there are many borrowers that do not fit the standard mold, which is when stated income loans started coming back because “rich” people, those with their own company, and those just starting out in life were left in the lurches when it came to buying a house.

Stated Income does not Mean no Qualifications

Today, stated income does not mean that you do not have to prove that you can afford the loan as it did in the past. Lenders are finding ways to prove this with other methods. For example, if you are self-employed and your tax returns do not show adequate income because of the write-offs you use, standard lending will not enable you to get a loan. However, if you have the income and can prove it with bank statements and excellent credit scores, then you will have an easier time trying to convince a lender that you are worthy of a loan because you show a history of paying your bills on time as well as bank accounts with adequate reserves.

Just how much do you need to qualify for a loan today? Every lender will be different with their requirements. Some lenders will need to see at least 12 months of principal, interest, taxes, and insurance in your bank account in order to qualify you for the loan, while others will want more or less than that. As far as credit scores go, many lenders want you to have a score that is at least 700 or higher in order to qualify for a non-income verified loan. In addition, most lenders will not allow a high loan-to-value ratio on stated income mortgages. Instead, they will need to put down a significant down payment, typically at least 20 percent in order to be considered.

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The Reason for the Change

Many people wonder just why lenders would stick their necks out again after what happened with the housing crisis. Shouldn’t lenders only give loans to those that can prove they have the income to afford them? While in reality this makes sense, it leaves the millions of Americans that were forced to leave their employment and become self-employed without the ability to purchase a home. Since this makes up a large portion of the people that would otherwise be purchasing homes, it could hurt the housing industry in the end. These “little guys” need to get out there and be able to purchase a home and they are making a name for themselves; they just might not show it on paper at the moment. This is especially true for those that are just starting out and write off every expense they can on their tax returns in order to decrease their tax liability so that they can keep their income and pay their bills. Since they do that, lenders look at their tax returns and think they make next to nothing, when they do – it just does not show up on paper. Why should these workers be punished after they are doing the economy a favor by producing products/services and generating an income? This is why stated income mortgages have made a comeback with a slight twist.

Big Banks are the Heroes

The biggest problem seen out in the mortgage industry when it comes to stated income mortgages is who is going to purchase them? The secondary market wants nothing to do with these mortgages as they were a large part of what caused the problems in the first place. This is why you will not see the common lenders providing stated income loans, because they do not hold onto their own portfolio – everything gets sold. Larger, private banks however, are keeping these loans in their own portfolio. These are the lenders you need to seek out if you want to get a stated income loan. There might be a handful of private investors that are willing to take the chance and purchase stated income loans, but for the most part it is the private banks that keep them on hand and manage these loans themselves that provide the most success for the self-employed.

Figure out your Compensating Factors

Before you apply for a stated income mortgage, it is important to look at your entire loan profile. Starting with your credit – do you have excellent credit scores? Is your credit history clean, meaning that you have no late payments within at least the last 12 months? These are things the lender is going to look for as they need to make sure that you are not a credit risk at all. Typically a score below 700 by even one point will render you ineligible for a stated income loan. In addition, you will need to prove your worth with your assets. Verifiable bank statements will need to be provided in order to ensure the bank that you have not only enough to afford the loan on a monthly basis, but that you have backup reserves in the event that something were to go wrong.

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Offer Letter Loans

Another version of stated income mortgages that lenders are now able to offer are the Offer Letter Loans. These loans are perfect for those that are changing jobs (relocating), recent college graduates starting their first job, and those that are going back to work after being laid off for a period of time. Offer letter loans work in a similar fashion to stated income mortgages as the lender is relying on the offer letter provided by the employer to qualify you for the loan. There are no paystub or W-2 requirements in order to qualify. There are some strict criteria that must be met however:

  • There must be an offer letter that is non-negotiable or contingent and it must be signed by both the employer and the applicant
  • The job must be starting within 90 days of the loan closing; this must be proven
  • The loan must be for an owner occupied primary property
  • It must be a single family property (home, condo, or townhome)

In addition, the borrower will have to provide proof of adequate assets. The amount required will depend on the length of time between the loan closing and the date the applicant starts his new job. There should be enough assets to cover the principal, interest, taxes, and insurance for the time period that the applicant will not be working in addition to at least 3 months of reserves in the event that something were to go wrong.

As you can see, stated income mortgages are making a comeback, just in a different format than they were once offered. Lenders still need to make sure that they are not providing loans that they know the borrower cannot afford as the lender could find themselves liable for costs that pertain to the violation of the Unfair Lending Practices set forth by the government. Taking extra precautions by asking for adequate proof of reserves as well as requiring excellent credit scores is just the first step in ensuring that a borrower can afford a loan without difficulty.

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