Stated income loans are not a thing of the past – they still exist, and in fact, are making quite a comeback lately. More and more people are becoming self-employed thanks to the downfall that the economy took, making fewer jobs available, which forced people to look outside of the normal ways of making money. This, in turn, has forced lenders to open up the door to stated income loans in order to keep the housing history thriving. So what is different about these loans when it comes to qualifying?
No Tax Returns
In most cases, you will not need to provide your tax returns for qualifying purposes. Some lenders might want to see them just to see that you do make money and that your write-offs are the only reason that you do not qualify since the lender can only use the bottom line income on your tax return, not the gross income. In some cases, lenders are able to add back specific expenses into your net income, making it easier for you to qualify for a fully documented loan. In the cases that the tax returns do not help your case, however, the tax returns do not need to be used – the lender can ask for alternative documentation to provide to the underwriter.
In almost every case, bank statements are necessary in order to qualify for a stated income loan. This might seem strange since you are “stating” your income, but the lender has to have some type of verification that you physically receive the money, which is usually done with your bank statements. You will have to decide which type of bank statements to provide the lender though – either business or personal bank accounts. If you choose business accounts, you cannot also provide your personal accounts because there is the risk of using the same funds twice (receiving them in your business account and transferring them to your personal account). In addition, if you do not own the business by yourself, you will have to split the amount of assets in the business bank account, which could lower the income that you are able to claim, so choosing the right bank account is a crucial step.
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If you are choosing a stated income loan, it is likely because you are self-employed. Because this means you will not have W-2s and paystubs to prove your income from a reputable source, lenders require that you obtain a letter from your CPA stating that you are in business for yourself. This letter must be on the CPA’s letterhead and include the following information:
- The name of your company
- The date you started your business
- The date the CPA started handling your finances and taxes for you
- Any other pertinent information he has about your business
The reason behind the CPA letter is to have a non-interested party verify your self-employment. Just having you say that you are self-employed is not enough verification for a lender; they need to diminish their risks as much as possible.
IRS Form 4506
Even though you do not provide your tax returns for qualification purposes, some lenders require your tax transcripts just to prove that you filed taxes. They will not use the income reported on the transcript, but will just use it for verification purposes. It is another layer of protection for the lender as they are taking a chance on you by providing a loan without fully documenting your income. The Form 4506 is just a form you need to sign and provide your social security number, giving the lender permission to obtain your tax transcript.
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If you have not owned a home in the past, the lender will require some type of housing history from you in order to qualify for a stated income loan. This does not mean if you are a first-time homebuyer that you will not be able to get a stated income loan – but you will have to show financial responsibility with housing payments in the form of rent. Lenders typically want a 12-month history of your rent payments. The verification must either come directly from your landlord on an official Verification of Rent form or from your bank account in the form of canceled checks to show not only that you paid the rent, but the date that the landlord cashed it and that they were always on time payments.
The Remaining Documents
The remaining documents needed for a stated income loan are those that are also needed for a standard loan. These documents include:
- Uniform loan application
- Standard appraisal
- Gift letter for any gift funds you receive from family, friends, or your employer
- Title documents
- Credit reports and proof of any liabilities
- Proof of homeowner’s insurance
- Proof of flood insurance if the home is in a flood zone
- Any letters of explanations for unique circumstances surrounding your loan
The stated income loan might require you to get a little more creative with your documentation to obtain a loan, but it is worth the effort. The stated income loan is looked upon a little stricter than a fully documented loan because of the higher level of risk you provide the lender when you cannot fully verify your income. The lender needs to make sure that all of the bases are covered in order to minimize the risk they face.
Every lender requires different documentation for any type of loan, but especially the stated income loan. Because this is a non-qualified mortgage, the lender does not have to abide by the standard QM guidelines, but can add their own requirements, called lender overlays to ensure that the loans they provide are low risk and profitable for them. As stated income loans continue to increase in popularity, lenders will begin to open up the possibilities for a variety of borrowers, but for the time being, you might have to search a little harder to find a lender willing to provide you with a loan.