The stated income loan has made a comeback, giving many self-employed or heavily commissioned borrowers the opportunity to become homeowners. This is good news for many people as getting a home loan was rather difficult for them prior to the rebirth of this program. Even with the Dodd-Frank Act and the Ability to Repay Rule, lenders are able to give borrowers a loan without verifying their income the standard way. Instead, they use bank statements to ensure that the borrower has plenty of assets and that the income they say they receive is actually received in their bank accounts. One thing that confuses many people, however, is the need to verify a borrower’s employment even with a stated income loan. There are many reasons, though.
Reasonable Income
Underwriters are trained to know the standard amount of salary that a borrower should make in any given industry. This makes it impossible to state your income higher just to get your debt ratio down so that you can get approved. For example, if you hold a basic office job and state that you make $100,000 per year, the lender is going to know that this is not true. When they verify your employment, they will get an accurate description of your job which will help them determine whether or not the income you state is reasonable or not. If they are not sure, they consult with reputable professionals in the business to get an idea of the average income for your position might be.
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Ensure Employment
Another reason lenders verify your employment on a stated income loan is to ensure that you are in fact employed. You can show bank statements that show income coming in, but that does not always mean it is from your employer. People have ways of making their bank accounts look stacked even if they are not. By verifying that you are currently employed, the lender can be reassured that the money in your bank account comes from your employment income.
Determine Costs
Certain jobs and most businesses owned by borrowers require specific expenses to be paid. Lenders are aware of the standard costs of any type of business or employment and are able to determine a borrower’s income accordingly. For example, if you are self-employed, your expenses will have to be deducted from the income you state unless you can show a Profit and Loss Statement that shows your income after the expenses are deducted. The same is true for certain positions that are with an employer but have non-reimbursable costs associated with them. The lender needs to verify that the costs of your business and/or job do not greatly interfere with your income, adding to your liabilities every month.
Ensure Consistency
Lenders also want to verify a borrower’s employment to ensure consistency in their line of work. This is especially important if you are new to the job. Lenders need to see that you came from a line of work that was similar to what you are in now. They typically want to see 2 years’ worth of work in the same industry, if not the same job. This might mean that the borrower will have to verify your current and past employment in order to get you approved for the stated income loan.
Don’t think of verifying your employment as a bad thing when it comes to a stated income loan. The lender is doing it for the good of everyone involved. They want to make sure that you can afford the loan for your own good as well as for theirs so that you are not defaulting on the loan because of an overestimated income on a loan that income does not truly get verified. Many lenders offer this type of loan today – if you are self-employed or rely heavily on commissions for your income, this could be a good solution to help you become a homeowner today.