Stated-Income

False Stated Income: Here’s Why You Should Never Overstate Your Income

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Misstating income was pervasive back then, the Great Recession is proof. With lenders required to evaluate a borrower’s ability to repay his/her mortgage, income remains relevant to qualify for a mortgage. This is especially true for stated income loans whose approval primarily hinges on the borrower’s income.

Despite regulations, fraud is still present even in today’s revamped stated income loans. There is the case of false stated income when a borrower “innocently lies” about his/her income to qualify for this kind of mortgage and/or a higher loan amount at that.

Find out why it’s never a good idea to lie about your qualifications that might result in loan denial and how lenders protect themselves from this kind of mortgage fraud.

Find out if you qualify for a loan, too.

Overstating Income Is Always a No-no

According to a Federal Reserve study, U.S. median family income rose 10% between 2013 and 2016.

Generally speaking, mortgage borrowers complete a Uniform Residential Loan Application, specifically Form 65 for those who want to get in the stated income program as per Freddie Mac that purchases mortgages including stated income loans in the secondary market.

Income, employment, and assets are checked in the normal course of making loans. Still, there are instances when some of this self-reported information is not verified.

For instance, Freddie Mac notes that the borrower’s employment or his/her source of income is the only item validated by a lender as it relates to income.

Self-employment income is generally harder to verify in itself because of certain expenses that get written off. But employment income can be overstated using fake Form W2s or by declaring additional sources without proper documentation.

Against this backdrop, it is possible for borrower-reported information, erroneous at that, to go unchecked. While one might be able to get away from lying on the loan application, the act is punishable by law.

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How Lenders Deal With False Stated Income

In Freddie Mac’s best practices combatting false stated income fraud, it recommends that lenders let their most seasoned loan officers handle stated income loans.

The government-sponsored enterprise encourages lenders to compare the borrower’s characteristics, e.g. age, employment position, education and experience vis-a-vis the income declared on his/her application.

Lenders might also have to look into how the borrower accumulated his/her assets. More importantly, how does the stated income loan figure into his/her monthly debt obligations.

If a salaried employee wishes to qualify for a stated income from an additional income source that is not documented, he/she must be able to specify in the application form which parts of his/her income are from this additional source.

A borrower who can’t qualify based on traditional income documentation such as W-2s and paystubs may not be eligible for a stated income loan.

Similarly, a non-qualifying spouse’s income must not be added to the borrower’s income for mortgage qualification purposes.

Lying about your income is risky for you and the lender because you might not be able to repay your loan later on. More than loan denial, you could face legal consequences if caught.

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Is it Possible to Get a Stated Income Loan for Investment Properties?

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Most banks are happy to finance investment properties for borrowers who have less than four mortgages under their name. Unfortunately, they frown on applicants who have problematic credit history, short employment history, have more than four investment properties in their portfolio, or those who have unconventional sources of income. Can the stated income option come to the rescue?

Stated income loans have their roots even before the housing crisis. In fact, they used to be very common, despite the high risk they carry. The accumulation of these non qualified loans led to the housing collapse in 2008, leading lenders and borrowers alike to shy away from such offers. However, they didn’t disappear altogether.

How do you get a stated income loan?

In the years that followed, stated income loan offerings shrunk but as the years erased the trauma of the previous crisis and more demand kept coming in, lenders began to see the profit potential in the underserved borrower market. Today, such loans are making a comeback. Are they safe? Experts suggest that these loans aren’t the same as their predecessors because of more stringent underwriting standards. Stated income loans today may be harder to qualify than their their subprime counterparts pre-recession.

If you get turned down by big banks on your investment property financing application, you can look to lenders such as:

  • Local Portfolio Lenders. These lenders lend their own money and don’t sell their loans to the secondary market.
  • Hard Money Lenders. They specialize in providing loans for fix and flips or rental properties for a short period of time.
  • National Lenders. These lenders specialize in financing rental properties.

Why is it hard to get a loan on investment properties?

After the 2008 recession, the government established rules that required strict underwriting requirements to make sure the borrower can repay the loan. This wasn’t the case before the crisis. Lenders used to provide loans even without verifying a borrower’s income.

This made it difficult for many borrowers who have the money but can’t establish the proper proof that they can, indeed, pay for the loan. Most of these borrowers have huge debt-to-income ratios due to the huge amount of credit on their name. Many of these investors also take huge deductions on their taxes. If your taxable income is too low, you’ll have poor chances of getting a loan. And even if the borrower does manage to get a loan, there’s another set of barriers to refinancing.

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What other benefits can I get from getting a mortgage under alternative lenders?

Most local portfolio lenders do not care if your properties are under your name or an LLC. Most banks require a property to be under the investor’s name which can pose a problem if he or she is trying to limit liability. A strategy that most investors follow is to transfer their properties to an LLC when they finance with a bank later. Unfortunately, the banks can call the loan due when the property is sold and transferring the property to an LLC is basically selling it. This complication is avoided with certain stated income lenders.

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What are the Pros and Cons of Stated Income Loans

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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.

Let’s get to the details.

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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.

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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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Are There Lenders Offering Stated Income Construction Loans?

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Are There Lenders Offering Stated Income Construction Loans?

Finding a construction loan while self-employed can be a bit more difficult than when you have a stable job with a stable monthly salary. When you are just starting up in business, it can even be harder since you will have less income history to show to your lender. Still, finding a construction loan to fund your home building needs while in such a situation is not unheard of. Stated income construction loans offer such financing programs with a different set of qualification standards. Let’s look into this option.

Who is eligible?

Stated income loans, in general, are designed to cater to the financing needs of individuals who find it hard to get loans from conventional lenders because of complications in their income. These include those who are self-employed, have seasonal jobs, or those who receive commissions.

Differences in income or too many write-offs in your tax returns can be red flags for conventional lenders. Instead, with a stated income loan, alternative documentation is used to verify your income.

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Finding the right lender

Stated income loans are typically offered by local lenders and banking institutions. Stated income lenders lay low after the legislative restriction post-crisis in 2008 but today, many lenders are re-exploring these options to tap into the remaining chunk of borrower market who place demand yet cannot be accommodated because of the said restrictions.

Still, you, as a borrower also need to exercise caution in finding the right people to work with.

Make sure you are in good shape before you apply. The following can help you prepare right for your stated income construction loan application.

  • Raise your credit. See to it that your credit history and record reflect no delinquencies and are at FICO 620 or above
  • Prepare your bank statements from the past two years
  • Prepare a good down payment amount

Before you apply, inquire first. Remember that an inquiry on your credit report can negatively affect your score. Get as much information as you can about the loan offer and do a comparison. Then narrow down your list and choose the best offer that fits your needs.

Although it is indeed hard to find stated income lenders that offer this type of loan, it is not enough reason to just jump at the first one that gives you an offer. Consider reputation and track record. Find a lender who will also protect your interest and not just their business.

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Is Now the Time for Stated Income Loans?

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Is Now the Time for Stated Income Loans?

The higher mortgage rates, coupled with a tighter lending environment courtesy of Dodd-Frank, seem to act as a backdrop for stated income loans to stage a full comeback. Consumers may have been hoping for more variety in mortgages with less stringent guidelines. Liar loans, low doc loans, however they were called back then, stated income loans have quietly returned and served that purpose for a niche group of borrowers.

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Less Risky Stated Income Loans

Pre-mortgage crisis stated income loans lived up to their name. Borrowers state (overstate) their income and lenders skip the verification part. Nowadays, the lender has to verify the employment and assets of a stated income borrower.

One lender, for example, will review the pay stubs and tax returns for salaried employees and business and personal tax returns for the self-employed. Similar to stated income loans, bank statement loans usually require a year’s worth of bank account transactions to see if the borrower is generating positive cash flows.

These measures serve to lessen risky lending practices. For the lenders, they have to make legal representations about the loan and could face a lawsuit if they have not done the appropriate due diligence.

Lenders also have more advanced automated systems to help them underwrite loans, checking if the loan application makes sense and complies with existing regulations.

A Return to ARMs?

The problem of the past stated income loans was their features that only added risks to an overstated income. Most of them had variable rates, which would be difficult to grasp with their caps, limits, margin, etc.

Some stated income loans were option ARMs under which the borrower can pick how he/she will pay back the loan in interest-only payments, minimum payments, 30- or 40-year amortizing payments, or 15-year amortizing payments.

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The first four options called for really low monthly payments so less equity was built into the loan at the onset. Some of these loans didn’t even have down payments. This negative equity and falling home prices led to widespread foreclosures.

Stated income loans nowadays are still offered in variable rates but they also come in fixed rates. Fixed-rate mortgages offer stability and are easier to manage.

Interestingly, the current state of mortgage rates has made ARMs appealing because they offer lower rates than FRMs. They start with fixed rates until they adjust once a year. They’ve been an option for those who plan to move out or sell the home once the fixed rate period is over.

Stated Income Loans Serve a Niche

The Dodd-Frank Act ensures that the subprime mortgage crisis won’t happen again. But it has made access to mortgage credit even tighter for those who have trouble verifying their true income. These same people often apply for bigger loans.

Thus, the self-employed and the affluent turn to stated income loans as a specialized loan product for them. Alternative documents may be presented for employment verification; but higher down payments, better credit scores, and lower DTI ratios are required for stated income loans.

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Finding Financing for Your Investment Property

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Finding Financing for Your Investment Property

Investing in real estate is a lucrative way to grow your money, just ask Warren Buffett. From a single-family home to a multi-family building, an investment property is an income-producing venture for years to come.

There are many ways to fund your first-ever foray into the world of real estate investing, such as (a) mortgages, (b) home equity loans and (c) investment property loans.

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Stated Income Loans, et al. for Investment Property

Besides primary residences, mortgages have been used to purchase rental properties. Despite its investment-driven purpose, these mortgages are classified residential because they cover one-to-four unit properties.

  1. Stated income loans are made for self-employed professionals, small business owners and high net-worth individuals who are into real estate investing. It’s no surprise because a typical down payment on a stated income loan is 30% at the minimum. Stated income lenders also need a higher level of cash reserves sufficient to cover three to 12 months’ worth of monthly mortgage payments.
  2. By their stated purposes and intents, you can’t use an FHA loan to purchase an income-producing property. But situations are replete when it has been used for investing. Say you took out an FHA loan and then moved out of the house and have it rented out. In another case, you buy a duplex where you plan to occupy one unit and lease the other. Down payment for FHA loans could go as low as 3.5% for a credit score of at least 580.
  3. Conventional loans conforming to Fannie Mae and Freddie Mac’s standards can require at least 30% of the purchase price of the income-producing home as down payment. There should be enough cash reserves to meet six monthly mortgage payments. Moreover, a property management experience (being a landlord) of at least two years is required.

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Home Equity Loans for Investment Properties

Home values are expected to rise by 3.5% this year per Zillow. This bodes well for those who own their home outright or hold a significant equity in their homes.

Second mortgages such as a home equity line of credit or home equity loan can be used to finance the down payment on the second home. Back this second mortgage with cash savings and asset holdings for emergencies.

Using home equity is a popular way to do some house flipping, it is when you buy a home, renovate it and resell it for a higher return.

Investment Property Loans

These specialized loans are for individual and commercial real estate investors. Investment property loans are structured to assist investors in:

  • Financing and fixing properties
  • Refinancing existing properties

One final word. Just some reminders to help you with your property investing venture:

  1. Do your homework first before you put your hard-earned money or home equity on any property.
  2. Make sure that the desired property is eligible to be financed.
  3. Expect to generally see higher down payment requirements, higher rates, and bigger cash reserves on investment properties.

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Stated Income Loans: Alternative Financing for Rental Properties

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Stated Income Loans- Alternative Financing for Rental Properties

After the 2008 mortgage crisis, it became harder for many homeowners to own a home due to the implementation of the Qualified Mortgage Guidelines. Under this standard, borrowers are only qualified to get a loan if they have good credit standing, low debt, and income that can be verified. This left out homeownership opportunity for millions of Americans who don’t fit the bill.

The Qualified Mortgage Guidelines was installed to protect the lenders in case their high-risk borrowers default on their loans, a possibility which caused the housing crisis in the first place. This gives them a shield against litigation and allows them to sell their portfolios on secondary markets. Without the latter, they keep the risks on their own books. This is why it’s hard to come by home loans – but an investment property is an entirely different case.

Qualified Mortgage Guidelines do not apply to investment properties. In this area, lenders can therefore provide looser guidelines to help many borrowers qualify.

Financing an investment property with conventional loans can be as difficult as qualifying for a QM home loan. But this dilemma is resolved with stated income loans for rental or investment properties. This is advantageous for many investors who want to take advantage of the opportunity when home prices go down.

Consult the experts about your investment plans.

Not home loans?

Investment property loans are not considered home loans because they gain revenue for the borrower. Because of this nature, which is more akin to business loans than they are home loans, investors can get away with the qualified mortgage guidelines and offer it to borrowers with less stringent qualifications.

The general qualifications for you to qualify for a stated income loan for an investment property include the following:

  • good credit, at least 700, though minimum credit requirement may differ from lender to lender
  • at least 12 months worth of reserves in a liquid account
  • a ready down payment, typically at least 30 percent of the property’s price

You may notice that these qualifications are still high. That’s because even if stated income loans for investment properties are not covered by the qualified mortgage guidelines, banks still mitigate the risk and make sure their borrowers will be capable of paying back the thousands of dollars they owe. This is beneficial not just to the lender but also to the borrowers themselves. If you are in a tight financial situation, you might be better off delaying the financing now, or you risk getting into a bigger trouble.

Different lenders and banks vary in their guidelines and qualifications. It is best to inquire around before you make a decision on who to get financing from.

Does Adding a Co-Borrower to Your Mortgage Make Sense?

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Does Adding a Co-Borrower to Your Mortgage Make Sense?

The concept of adding a co-borrower is a common practice in the mortgage industry. It’s a practical move to share the costs of holding a mortgage or help you qualify for a bigger loan that you might not be approved on your own. In the initial or later stages of mortgaging, you can put in another name as a borrower to your loan.

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During the Application

When you ask a spouse, a friend or a family member to sign up on a mortgage with you, you are basically “pooling” all your income, assets and credit history together.

With the ability to repay rule in place, lenders are required to do a capacity check requiring traditional or alternative documentation as in the case of stated income loans. In the course of this verification, they might find that your monthly debts relative to your monthly income, as measured by the DTI ratio, is too high. If your co-borrower has a steady income (and that he/she has a lower debt-to-income ratio), it will help you qualify.

Similarly, you and your co-borrower could add your assets such as cash deposits, stocks and bonds to qualify for a loan with a bigger amount perhaps. Lenders check assets to see if these could support your closing costs, fees, and mortgage payments. There is also a reserve requirement that depends on the type of property you are buying.

To be clear, a co-borrower with a stellar credit will help you qualify and possibly get a lower rate only if you have a fairly good credit record yourself. Lenders will consider the lower of the two credit scores and if your score falls further behind, it won’t help in your application.

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During a Refinance

You can refinance to add a co-borrower to the loan. Just like when applying for a new mortgage, you and your co-borrower go through the verification process anew, income, assets and liabilities and credit history be under review.

Adding a co-borrower to an existing mortgage through a refinance is different from adding him/her to the title deed of your house. Except when he/she is related to you by blood or a spouse, a mortgage co-borrower does not have a security interest in the property although he/she has to pay back the loan with you.

Without a Refinance

You can skip refinancing and add a co-borrower to the mortgage but only to a certain extent. For instance, you add someone to the mortgage to put into writing his/her promise to pay some or all of your mortgage debt.

If your purpose is to add a child, spouse or parent, you are better off adding them to the mortgage deed, as mentioned above. They can be co-owners but not co-borrowers so they won’t have to be held equally responsible for repaying the loan.

Otherwise, you still need to refinance so you can add a co-borrower on top of getting a low rate, taking cash out of your home, shorten or extend your loan term, etc.

Be sure to ask your lender about the implications of getting a co-borrower and the options to remove him/her should there be a falling out as in the case of divorce.

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What is Considered Income by Mortgage Companies

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Income verification is a vital part of the mortgage process, or any loan process, that is. It is necessary to help lenders mitigate risk and determine which applicants have the financial means and capacity to pay for the money they will owe.

Lenders are as diverse as their income and eligibility requirements. What one considers as “income” may not be for another lender. There are various parameters that lenders look for in an income. Let’s take a closer look at these.

Salary

The most common type of income is salary for employed borrowers. You either receive your salary on a weekly, bi-monthly, or monthly basis, at a predetermined amount. Depending on how often you receive payment, the lenders will require you to submit a copy of your pay stubs for at least the past two months. The lender will use your pay stubs to calculate your gross annual income, on top of evaluating your credit report and your DTI or debt-to-income ratio.

Bonuses and Commission

Unlike salary that is fixed in amount, bonuses and commission can also be considered as income by some lenders despite its inconsistent nature. However, it will only qualify if you are able to demonstrate that you have been receiving this form for income for at least two years – and will continue to do so in the future. Because they are not fixed, these numbers will be annualized, meaning the lender will average the amount you receive in a certain period of years and not take the numbers you get per year individually.

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Self-Employment Income

In case of the self-employed, you can use tax returns in place of the pay stubs for income verification. If you are planning to get a mortgage and are currently self-employed, you might want to suspend writing off too many expenses so your tax records will be more reflective of your income. For stated income loans, you can also use bank statements to qualify.

Social Security and Disability Income

An award letter will be warranted by the lender as proof that you are indeed receiving social security and disability fund from the government. You must also be able to prove its receipt through bank statements for 12 months. This will show the lender how much money you are receiving which can then be counted by the lender as income. However, additional documentation must be given to show that you will be receiving said form of income for at least the next three years. This assures the lender the continuity of monetary receipt from which the borrower can get the money to repay the mortgage.

Child Support and Alimony

If you think your income is not sufficient to qualify for a mortgage, you can use your child support and alimony as an additional source of income. To utilize this, you must submit: a) a court-ordered divorce decree or child custody agreement b) bank statements showing receipt of said funds c) proof of how long you will be receiving the income. Like the social security and disability income, you must be able to demonstrate that the income will continue for at least the next three years, which might not be the case if your child is already 17 at the time of application.

What is okay for one lender may not be for the other. However, they are not usually far off. What is universally considered by these lenders are the longevity and consistency of your income. That is why the more consistent your earnings are, and the longer you’ve had the job, the better. But that does not mean it’s impossible to get approved otherwise. Take time to shop around and inquire to find the right match for you.