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.
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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.Click to See the Latest Mortgage Rates»