Stated income loans are still around, believe it or not. While they might have the same name, though, they are a completely different product. Lenders still verify your income; they just do so in a non-conventional way. If you do not have paystubs or W-2s to verify your income and your tax returns are not an accurate reflection of the amount of money you make each year because of the large amount of write-offs you take, a stated income loan might be the right answer for you. Before you start applying with different lenders, though, you should understand what compensating factors most lenders want to see in order to qualify you for the mortgage.
Large Down Payment
One of the easiest ways to convince a lender to approve you for a stated income loan is to have a large down payment. There is no minimum amount required as each lender creates their own program because subprime or alternative documentation loans are typically lender funded. So what a large down payment means to one lender might differ for another. In general, the closer you can get to a 20 percent down payment, the better off your chances are of getting approved.
You might wonder what difference a large down payment makes, but it is a very large difference. This compensating factor gives lenders peace of mind because you have such a large amount of money invested in the home. This means that you will more than likely try very hard to keep up with your payments. Let’s look at two different examples:
- Borrower A puts down the lowest down payment a lender will allow. This amount is 5% of the purchase price. If the purchase price was $200,000 that means the borrower put down $10,000. That seems like a lot of money, but it is only 5% of the amount of money the lender is giving you.
- Borrower B puts down a much higher down payment of 20 percent. With the same $200,000 loan amount, the borrower puts down $40,000. This is a significant amount of money which the borrower is probably very likely to work hard to avoid losing.
Both Borrower A and B put down quite a bit of money, but with $30,000 more invested in the home, Borrower B is much more likely to try to avoid foreclosure than Borrower A, which makes the lender more likely to approve Borrower B than Borrower A.
Good Credit Score
Believe it or not, a good credit score could be the only compensating factor you need. Because stated income loans provide the lender with a risk because they are not verifying your income the standard way, but are relying on other documentation, such as your bank statements to verify your income, they want to know that you are a good risk. The best measure of your level of risk is your credit score. The higher the score, the better payment pattern you have. This means you are more likely to continue that pattern in the future, including the payments on your new mortgage. What one lender considers “good” credit might differ from another lender, though. In general, the following is how credit scores are viewed:
- Scores over 750 are considered excellent
- Scores between 749 and 700 are considered good
- Scores between 699 and 650 are considered fair
- Scores between 649 and 600 are considered poor
- Scores lower than 600 are considered bad
Again, different lenders might look at scores differently, but if you have a credit score of 750, most lenders will not turn their heads at your application. On the other hand, if you have a score of 600, you might have a harder time finding a lender that is willing to give you a stated income loan because of the level of risk involved and the complicated risk you provide with your low credit score. On average, lenders want to see a credit score over 680 in order to use alternative lending, but some lenders might be willing to take a lower credit score if you can compensate in other ways.
Consistent Employment History
One thing that any lender looks for in any type of program is consistency. You need to be able to show that you stayed at the same job or at least within the same industry for the last few years. You also need to show that your income was consistent as these two factors can go hand-in-hand. Here are a few examples:
- You have a five-year job history at your job, never changing positions. Your income increased slightly each year from a raise.
- You have a two-year job history at your job, never changing positions and your income stayed the same during that time.
- You have had two different jobs within the last two years, but they were within the same industry. The second job provided you with a much higher income than the first job. This shows that you were able to better your situation, which is typically not penalized because of the lack of a two-year job history.
- You are self-employed for two years and have the proof from your licensed CPA stating that you have been self-employed during that time.
- You are self-employed, but only for one year, but your job prior to opening your own business was in the same industry and was for 10 years.
As you can see, consistency can mean many different things; it does not mean you are stuck at the same job for the rest of your life if you ever want to qualify for a mortgage, even a subprime mortgage.