You’ve probably heard about stated income loans by now. In fact, there are a lot of individuals who are looking into this type of loan. After all, it accommodates those who could not qualify for a conventional loan. But even if this loan exists, there are still some documents or paperwork that comes in handy when you apply for one.
In a nutshell, stated income loans are perfect for those who are either self-employed, small business owners, or retirees. This loan type once lost its popularity after the mortgage crisis took over in 2008.
But things turned out differently this time. There is now a demand for this type of loans again. And together with the rule that requires lenders to make sure their clients have the ability to repay, stated income loans are slowly making a comeback.
And while stated income loans have a more relaxed set of guidelines, lenders still need to see significant documentation that would prove your ability to pay off your mortgage. But unlike conventional loans, borrowers would have to produce a unique set paperwork that stated income lenders would likely require.
For self-employed borrowers, a CPA letter verifies your self-employment status. This is secured from the borrower’s CPA or tax preparer. This proves the accuracy of your employment status or business information.
The letter contains significant information like the applicant’s name, business name, address, and phone number. The nature of his or her business, the percentage of ownership, and the years that the business has been operating is also included.
It’s important to secure a record or copy of your bank statements when applying for a stated income loan. Lenders would still need some kind of verification of your assets and a record of your banking activities or transactions can accomplish this.
It’s important to note that you are the one who needs to decide which bank statement to show your lender. For small business owners, choosing to show your business account could make a difference if you don’t own 100% of the business. That’s why it’s important to be particular when making this decision.
For both first-time and repeat home buyers, showing your financial responsibility can be done by providing a history of your rental payments for at least the past 12 months. Lenders would usually look into this piece of document to verify that you are responsible enough to take out a mortgage.
This could be obtained directly from your landlord through an official Verification of Rent form or from your bank account. Rental history through your bank account could be shown through canceled checks. This would prove that you pay your rent with the date that your landlord cashed it and that you continually pay it on time.
IRS Form 4506
Some lenders would require an IRS Form 4506. Even if you don’t need to show your tax returns, the form will verify that you responsibly filed your taxes. The income reported on your transcript would not be that important.
When lenders verify this piece of information from you, it protects them by knowing that they can take a chance in providing you a loan even if you could not give a full documentation of your income.
The Bottom Line
In the end, each lender differs from the other. But these documents are some of the most important ones. It’s important to also remember that even if this type of loan has flexible guidelines, lenders would still need proof that you can handle the responsibility of carrying a loan.
And since these guidelines are generally achievable, it’s understandable that stated income loans would still have a unique and careful qualifying process since it can carry more risks than most standard loans. That’s why it’s important that, as a borrower, you do your end of the preparation and show your lender that they can trust you.