Stated-Income

Do Stated Income Loans Require Higher Assets and Reserves?

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Stated income loans do still exist despite the common belief that they went by the wayside. You may hear them by other names, such as ‘alternative documentation loans.’ They are not the same stated income loans we know from years ago. You still have to verify your income, but it doesn’t have to be in the standard way (paystubs and tax returns). Another major difference today is the amount of assets and reserves you need in order to qualify.

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Why Lenders Still Offer Stated Income Loans

You might wonder why lenders would even offer stated income loans today. After all, aren’t they the reason for the housing crisis? While no one can put their finger on what happened, it is definitely a possibility that they played a role.

Most lenders, if not all, put an end to the stated loans during and right after the housing crisis. They were too afraid to try something like that again for fear of going through default. After a while, though, they saw a need for a comeback. Self-employed borrowers and those working on commission were left without the ability to secure a mortgage despite their good credit scores and low debt ratios.

Today, the state income loans are back, just with different parameters from the loans you once knew.

What’s Required?

First, stated income loans are kind of misleading. You really cannot state your income. You still have to prove it, which is why the alternative documentation loan is a better name for them. Rather than providing your tax returns to prove income, you may be able to provide your bank statements. Here’s why this works.

Self-employed borrowers often write off a large number of expenses. This brings their adjusted gross income down and decreases the taxes they owe. It’s a perfectly legal move, but it can hurt them when they try to apply for a mortgage. Lenders have to use the adjusted gross income when figuring out how much money you make. If your adjusted gross income is very low in order to reduce your tax liability, it could make it impossible to secure a mortgage.

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Letting these borrowers use their bank statements to prove their income will allow the use of the money borrowers actually make, rather than what’s reported on paper. Borrowers must be able to prove consistent receipt of the income. The easiest way to do this is to show receipt of income around the same time each month. Whether it’s weekly, bi-weekly, or once a month, regular receipt of income makes it easier for lenders to determine your actual income.

Proving Assets and Reserves

Because stated income loans pose a higher risk to lenders than any other type of loan, they often require stricter guidelines to ensure that you can afford it. One thing they often pay close attention to is your assets. This helps lenders know how easily you can afford the loan. They can look at this factor in several ways:

  • Down payment money – Just like any other loan, the lender needs to make sure you have the money available to put down on the home. Stated income loans usually require higher down payments than standard financing options. You may find that you’ll need a 20% down payment to get a loan from certain lenders.
  • Reserves – Lenders also like to know that you have money left over after you pay the down payment and closing costs. Having liquid reserves means you have money that can cover your mortgage payment should something happen to your self-employment income. They determine the amount of reserves you have by determining the number of months of mortgage payments your money can cover.

The Lender Requirements

Unlike conventional or government-backed loans, there are no specific guidelines that every lender follows when it comes to stated income loans. These loans are what you call portfolio loans. In other words, the lenders providing the loans also keep them on their books. They do not sell them to investors. This allows these lenders to make their own rules.

Because lenders can set their own rules, there are not any published guidelines you can follow. It’s up to you to shop around and figure out which lender best suits your qualifications. For example, Lender A might require self-employed borrowers to have 12 months of reserves on hand while Lender B might only require 6 months. If you only have 6 months available, Lender B would be your only option.

The key to finding the right lender when getting a stated income loan is shopping around. You will likely find that most lenders require higher levels of assets and reserves, but you may find an exception to the rule as you shop around.

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A Quick Guide To Home Buying For Self-employed Individuals

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If there’s one thing every home buyer has to face, it’s the different hurdles that need to be dealt with. But then if you’re self-employed, the struggle is even more stressful.

It’s no secret that buying a house is not a walk in the park. Everyone has to go through a long and winding road of loan applications, processes, and waiting games.

Getting a mortgage is especially harder for them and applying for a loan is only the tip of the iceberg. This is why it’s best to plan ahead and prepare for what you’re about to deal with. And although preparing doesn’t promise a 100% stress-free process, it would definitely take a lot of the burden off.

Improve you credit

If you’re self-employed, you might want your lenders to see that you have a satisfactory credit score. Lenders usually use this as a basis for approval as well as getting the best rates for you.

However, boosting your credit doesn’t happen overnight. To keep your status in check, try to keep your balances low. Continue paying your dues on time. And during your mortgage application process, try not to apply or open other credit lines and add up more debts in the process. This usually doesn’t give a good impression for most lenders.

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Organize your expenses

It’s not illegal to keep both personal and business expenses under the same account but it’s not really a good idea if you want to prove the state of your income.

Other than making a good impression, lenders tend to have an easier job in going through your expenses by keeping separate accounts for business and personal use. This also helps you deal with taxes with lesser frustrations.

Prove your ability to pay

Of course, lenders would like proof that you can carry on a mortgage in the long run. Before they grant a loan, they want to know if you can pay them back. This is why they look into your income, through necessary documents.

In cases where you’re self-employed or running your own business, they would need to verify the existence of your business by asking for proof of your business license, a letter of verification from a Certified Public Accountant or an Enrolled Agent.

Prepare the paperwork needed

Secure the necessary documents your lender might need. These would prove that you can be trusted with a mortgage.

Along with showing your business license and CPA letter, documents like bank statements, tax transcripts, and the like are usually looked into.

Look into different loan options

Try to shop for loans that you think you could qualify. You can check if you can try your luck with a traditional mortgage and see if you can score a loan.

But if you can’t there are alternative loans that cater to unique situations just like self-employed borrowers. Try to research about different non-qualified loans like stated income loans and others. Ultimately, be careful when you choose a mortgage. Weigh in your options carefully before you jump to a decision.

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The Ups and Downs Of Stated Income Loans

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It’s very crucial process for interested homebuyers: choosing among the many home loans that would work for them. The application process itself is even as crucial. It goes to show that home buying is no easy task.

For some unique situations, stated income loans are a perfect fit. This type of mortgage does not require traditional documentation like pay stubs or  tax returns to verify your income.

But just like any other loan, this comes with upsides and downsides. Weighing the pros and cons before making a decision is always a good idea.

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Advantages

It’s a good option for self-employed borrowers

This is typically a good route for self-employed individuals that are seeking to buy a property of their own. Because of the nature of the activity, finding solid documentation as proof of regular income can be a little tricky. Because stated income loans provide a sense of leniency for those who could not meet the standard documentation requirements for traditional loans, this becomes the next possible choice.

The application process is quick and easy

Coming from their name, stated income loans forgo the fuss that comes with verification and other significant processes that go with the application. When you apply, this loan skips to the part where lenders review and verify your information on your tax returns.

Disadvantages

It typically comes with a higher interest rate

Since it basically comes with a stress-free process, stated income loans charge a higher interest rate. And although it still goes by within industry standards, a higher interest rate means a higher monthly mortgage due.

The risks could be higher for you

In connection with it coming with higher rates, borrowers for this loan should be certain they can carry on the monthly financial responsibility. If you make a hasty decision like purchasing a property that is beyond your means, not being able to meet your obligations could lead to having your loan go into default.

In the end, the biggest decision lies in your hands. With both advantages and disadvantages, it can help you come with a well-thought decision.

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Is it Difficult to Get a Mortgage if You are Self-Employed?

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If a lender had to describe the perfect borrower, chances are they wouldn’t say a self-employed borrower. Unfortunately, those who work for themselves pose a higher risk for lenders. That doesn’t mean they can’t get a mortgage. Is it more difficult? Maybe, but really it just means a little more time and patience. If you have the income to qualify, chances are there is a lender willing to give you a loan. You may have to shop around a little more, but the lenders are out there.

Things You Need if You are Self-Employed

If you are self-employed, prepare yourself for a more in-depth process. Having the following attributes can help you secure approval.

  • High credit score – You already pose a risk by not having a salaried position. That’s strike 1 in the lender’s eyes. In order to make up for it, you need a high credit score. This shows lenders you are a responsible consumer. You don’t overextend yourself and you only take what you can handle. Because your credit score is comprised of so many aspects, it shows lenders that you do handle yourself well.
  • Low debt ratio – Again, because you already pose a risk working for yourself, you need a low debt ratio. This shows lenders you don’t overspend. What’s the magic debt ratio? There is no specific answer. If you want a conventional loan, you should have ratios around 28/36. If you apply for an FHA or VA loan, they have slightly less strict guidelines. You may have a debt ratio as high as 43% and still qualify. In general, the lower the better, though.
  • Reserves – Your income likely isn’t steady if you work for yourself. That could be the case for someone that works for a company as well, though. Because of the risk, though, you’ll need reserves. Shoot for 6 – 12 months at a minimum. This means 6 -12 months’ of mortgage payments in a savings or other liquid account. This shows lenders you can continue to pay your mortgage if your income stopped.

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Watch Your Tax Returns

One thing that can dampen your ability for loan approval is your tax returns. You work for yourself so of course, you want to take every credit you can. However, lenders only use the income you claim on your tax returns. It’s like a double-edged sword. You don’t want the higher tax liability, but it could leave you without mortgage approval.

If you have the time to plan, consider taking fewer deductions for a couple of years. The two years leading up to your mortgage application are the most important. Generally, lenders don’t go back any further than that. This may mean you pay more taxes for those few years, but it will help you get the home you want.

Watch Your Increases and Decreases

Another aspect of your income that lenders watch is its pattern. If you have 2 years in a row where your income decreased, a lender may be wary. This doesn’t mean if you have certain periods of the year that you do better than others that you are out of luck. It means if your tax returns overall show a decrease from year to year. This shows instability. Add this instability to the risk of you being self-employed and you are a high-risk borrower.

Try to apply for the mortgage when you have 2 years of increasing income. This shows success and probably continuance of your income. If you show any signs of weakness in your income, a lender may not let it slide.

Show Experience

New business owners are at high risk for being turned down unless they have experience in the industry. If you open a new business, make sure it’s in an industry you know and understand. Maybe you have a degree in that field or you worked in it before. Any experience you can show will reassure the lender that you have what it takes to succeed. If you jump from one industry to the other without any type of training or education, a lender may not want to take a risk on you.

Have a Third Party for Verifications

No matter how successful you are at your business, you need a 3rd party to verify every aspect of your business. Usually an accountant suffices. Someone that handles your payroll and other financials can verify what you say is true. The accountant can vouch for your Profit and Loss Statements and your tax returns. They can assure the lender that you make what you claim to make. Make sure your accountant isn’t a family member or someone with a vested interest in the business either. You need that degree of separation for the lender to take it seriously.

Other than the few things mentioned above, everything else about a self-employed mortgage remains the same as other mortgages. You must prove you can afford the loan and that you have a steady job. Your job is just different than those with a W-2. You may have to jump through a few more hoops, but they usually get you to your loan approval.

If you have a hard time with one lender, shop around for others. There are many portfolio lenders that offer special programs for those who work for themselves. You can also go mainstream and secure a conventional or government-backed loan. You have many options; you just need to see which one fits your needs the most!

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No Income Verification Loans: Another Name for Stated Income Loans

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No Income Verification Loans- Another Name for Stated Income Loans

With mortgage rates fluctuating, alternative mortgage products are bound to emerge as they once flourished before the housing crisis. No income verification loans or stated income loans have been one of those mortgage products. While not as prevalent as they were then, today’s stated income loans remain an option for those who can’t document their income the traditional way.

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No Income Verification Loans

With stated income loans, borrowers don’t have to go through the process of income verification using standard documentation, primarily pay stubs, tax returns, and Form W-2s.

  1. Not all borrowers are salaried employees receiving paychecks twice a month; some of them work on a commission basis while others run their own businesses or earn from their investment portfolios.
  2. Tax returns do not accurately reflect one’s income. Business owners often deduct some expenses to reduce their taxable income.

What stated income loans entail is less reliance on those documents to verify a borrower’s income. Your employment will have to be verified but lenders will use other forms to prove that your income meets their standards.

For example, they may require a proof of self-employment from a certified public accountant. Lenders may also require two years’ worth of federal tax returns and transcripts to show you’ve been paying taxes.

No Income Verification Loan Requirements

With fewer documents to work on, lenders have to make sure the loan is sound and the borrower able to repay. It wasn’t long ago when stated income loans were called liar loans because some borrowers or their loan officers inflated their income and asset holdings to get larger loans for pricier homes. These risky transactions contributed to the subprime mortgage crisis of 2007.

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Against this backdrop, no income verification loan lenders require that the borrower put up at least 30% equity. Some lenders may require 40% down payment as borrowers of stated income loans are understood to have a high income, albeit hard to document.

Another primary requirement is a stable work history because lenders have to verify your employment, after all. Lenders differ by their definition of a “stable” employment record but it could be no glaring employment gaps and job switching all too often.

Moreover, you must possess a high credit score, impeccable even. People with good credit scores have a dependable payment history.

Lenders may require other documents such as rental history and bank statements.

No income verification loans are clearly not for everyone, they target a specific group of homebuyers who can afford to take out mortgages with bigger down payments and higher standards in terms of credit and assets.

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Tax Hurdles and Alternative Documentation for the Self-Employed

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‘Self-employed’ is a term generally associated with anyone who doesn’t hold down an office job with regular hours. In this sense, it includes home-based employees and freelancers. To avoid confusion and to serve the purpose of this article, let’s identify the self-employed individual as someone who owns and runs their own business, in whatever that might be.

Perks of the self-employed

There are definite perks to running your own business. Whether you sell products or offer a particular service, you are your own boss. You work on your own time and are in control of every aspect of your enterprise. You can design operational processes and decide who to hire.

Profit? You get all of it of course. You are your own employer so you reap financial benefits from the money that the business makes.

Tax hurdles and such

Being self-employed may prove advantageous in most areas. However, this isn’t usually the case when it comes to financing a home purchase. Income verification is an essential step in the underwriting process. The lender seeks to find out if you have the financial ability to repay the loan based on the supporting paperwork. A tax form is a document that gives the underwriter an insight as to what your income is really like.

Submitting tax forms can be tricky when you’re self-employed. Normally, taxpayers have a tendency to maximize their deductions. This strategy doesn’t work well for business owners or freelancers because more deductions mean less income. And less income may reduce your chance of being approved to borrow a specific amount of money.

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What options are there?

There are a number of ways to get around the dilemma above.

  1. Leave some deductions on the table

To better your chances for a home loan, leave some of those business-related expenses on the table. Not declaring each and every bit of cost incurred in running your business keeps the income stated on your tax form within a reasonable amount. Find information for filing taxes as a self-employed individual here.

  1. Look into home loans requiring alternative documentation

Barely verified mortgage applications are a thing of the past. But some lenders are offering alternative products to the self-employed borrower. Collectively, they are known as non-qualified loans. Unlike traditional loans, these financial products are more flexible when it comes to paperwork. In some cases, little to no down payment is required.

One product in particular, the stated income loan, allows you to put down your income on the application form but doesn’t necessarily request tax forms and paystubs.

Browse through this website to learn more about stated income loans. Or talk to one of our lenders.

4 Stated Income Loan Facts You Need to Be Aware Of

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It’s easy to see why a stated income loan appeals to someone who is self-employed. A lender offering this won’t be after your W-2 statements or paystubs. He’ll look at the income on your application form without question. Well, most of the time anyway.

In the real world, a stated income loan is not as straightforward as most people make it out to be. If this is an option you’ve been considering, best orient yourself with a few facts.

1. A stated income loan has different versions.

The term ‘stated income’ is often used in the most general terms, like the ‘no doc’ loan. However, this financial product can be packaged differently, depending on the borrower’s circumstances. A lender may offer two different proposals to individuals who technically qualify for a stated income loan.

»Alternative loan options for the self-employed borrower.»

2. Lenders may not always take your word for it.

Your lender may accept the income you’ve written down on the form, but this doesn’t guarantee that you’ll get the loan. Your application may be subject for review so you still need to be ready with documents that show just how much you make.

3. It could cost you more.

Banks and private lenders offering stated income loan programs often deal with borrowers who have substantial credit and significant equity on their current home. Even so, the lender is still at risk because such applications do not require full documentation. Financial institutions will pass on that risk to the borrower, in the form of a higher interest rate.

4. A stated income loan saves you time. But do you really need to save such time?

Borrowers benefit from a shorter processing time with this loan because verification is (mostly) eliminated. Still, you should consider if this will be helpful to you at all. Neither you nor the buyer is likely to want the settlement concluded next week since you’ll both need time to prepare for the move.

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For the Self-Employed Borrower: Getting that First Mortgage

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A couple of years ago, the self-employed borrower’s chances of getting a loan were nil. Today, the odds have decidedly improved. Good economic conditions have paved the way for low mortgage rates. The same has also encouraged investors to take on loans from individuals with limited documentation.

Government-sponsored agencies that back loans are also taking an inclusive stance when it comes to self-employed borrowers. In July, Fannie Mae issued new guidelines that pertained specifically to self-employed income.

Combined, these create conditions favorable for business owners and freelancers to buy a house.

Are you ready for your first mortgage? To clue you in, here are the different phases you can (and should) go through.

Phase 1: Research

There’s no surefire way to get that home loan. However, there are things you can do to up your chances for approval. The right information makes for an empowered borrower, particularly one with your circumstances. These guide questions can help make research easier.

What loan options are there?

Being self-employed, standard loan products may not be applicable to you. Now that doesn’t have to be a drag because alternative loans come in varieties too. There’s the stated income loan that allows you to indicate your income on the application form, without the need to furnish tax records and paystubs. A bank statement loan allows income verification via the activity on your accounts, as indicated by your bank statements. Read up on the guidelines for these so-called ‘alternative loans’ so you’ll know where your borrower profile fits best.

»You could also ask the experts here.»

How do I go about in choosing a lender?

Knowing what loan products you can qualify for streamlines your search for a lender. Focus on the ones in your area that cater to the self-employed clientele. You can find them online or through recommendations from family, friends, or colleagues. Be sure to compare rates and fees.

Phase 2: Application

Phase two starts after you’ve selected a lender. Applications can be done in-person, online, or via telephone. It’s highly recommended that you go and fill out the form at the lender’s office. This way, you get to meet the loan officer and ask questions. Applying for a loan is an important step so you need to know exactly what you’re getting into.

On the form, you’ll be required to give information about your annual income, savings, debts, and employment history. Once completed, this is passed along to an underwriter.

Phase 3: Processing

The underwriter is the person responsible for reviewing your application, ensuring that you meet the requirements set forth by the bank or private lender. When needed, you may be requested to provide some type of documentation to substantiate the data on your application form.

Keep in mind that you could qualify for more than one loan type. Thus, it’s best to have all relevant documents ready in case they are needed. These include but are not limited to the following:

  • Federal income tax returns
  • Credit reports
  • Bank statements
  • Documents showing the viability of a business (if applicable)

If your application has passed the review after underwriting, it will then be issued a “Clear-to-Close”.

Phase 4: Closing

The legal transfer of ownership takes place during this phase. This is when you are required to pay for the down payment and other necessary fees that come with the purchase.

»Speak with a reputable lender today.»

Why you Need to Plan for a Mortgage when you are Self-Employed

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Why you Need to Plan for a Mortgage when you are Self-Employed

If you are self-employed, you have a lot of flexibility when it comes to many things, including how your income looks on paper. Most people take advantage of the opportunity to write off every expense and take every deduction they can on their taxes year after year. While this might help you to reduce your tax liability and save you money in the long run, it can hurt you when it comes time to apply for a mortgage. If you are self-employed, it is very important that you plan for the future so that you can have an easier time obtaining a standard mortgage, rather than having to go the alternative documentation route.

What do Mortgage Lenders Want?

Basically, mortgage lenders need to see that you make money on paper. It is not enough to say that you bring in $100,000; you have to show it on paper and not just your bank statements. Lenders need FULL documentation for conventional loans and to meet the Qualified Mortgage Guidelines. This usually means that you have to provide paystubs and W-2s, but since you are self-employed, they will require tax returns with every schedule that you file.

How Tax Returns Hurt You

You might wonder how your tax returns could possibly hurt you; after all, you report your income accordingly. While this might be true, lenders have to look at the bottom line – the income you report and pay taxes on. Chances are, since you are self-employed that the bottom line number is not the number that you actually bring in. This is the number lenders use for your qualifying purposes. This means that if you report a loss, the lender uses the negative income to calculate your debt ratio, which it goes without saying, will not get approved.

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How do you Work Around It?

If you want to take advantage of the low rates that conventional loans offer and avoid the higher rates and costs of alternative documentation loans (bank statement loans) require, you will have to plan accordingly. Lenders use the prior two years’ worth of tax returns to calculate your qualifying income. If you plan far enough in advance, you can avoid taking as many deductions and writing off as many expenses so that your tax returns are a more accurate reflection of the money you bring in on a yearly basis. Yes, this probably means paying more taxes for those few years, but if it helps you get a more affordable mortgage, it can be worth it.

Remember that lenders will need the last 2 years’ of tax returns. If you have one good year, but the year prior to that reported a loss or very low income, the lender will take an average of the 2 years. If this average is not high enough, you will not qualify. They do this in order to account for the lows and highs that you go through as a self-employed person. If your company provides products or services that are seasonal, chances are your income is cyclical, which means high at some points and low at others. Lenders need to make sure they are accounting for those low periods, which is why they take an average.

The earlier you start planning for a mortgage when you are self-employed, the more likely it is that you will be able to get approved for a conventional loan. Work with a lender or your tax accountant to figure out the way to work it out with your income so that when the time comes to apply for a mortgage, you are able to get the low interest rate and terms that you can feel good about.

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