Stated-Income

Low Doc Loans – Are They Out There?

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Mortgage applications today mean supplying what feels like pounds of paperwork. The days of the low doc loan seem long gone. Just when you think you’re done, the underwriter asks for more. What if you don’t have the paperwork they need? Are you out of luck?

The good news is, you still have a chance at finding a mortgage. The bad news is it will require quite a bit of shopping around. You’ll need to find a lender willing to keep the loan on their books. A loan that doesn’t fully document their income the “right” way is a non-qualified loan. Not all lenders offer these programs because they can’t sell them on the secondary market.

That doesn’t mean there aren’t lenders out there. You just have to know what to look for and how to shop them.

Who Benefits from a Low Doc Loan?

First, let’s look at who could use a low doc loan. Generally, it’s the people who can’t fully document their income. This does not mean they can’t afford the loan. It means they can’t prove their income with paystubs or W-2s, the traditional way. Instead, they use things like bank statements or investment statements. These people may have a lot of money and can easily afford the loan. However, without those paystubs or tax returns, they can’t get a loan.

The most common people looking for this mortgage alternative are:

  • People who work for themselves or a family member
  • Borrowers with limited work history because they just started out or are at a new job
  • Borrowers living on their investments or on retirement income

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These people can’t verify their income the traditional way. But, what they can do is verify that they can afford the loan. This is a key factor for any loan. Whether a loan is qualified or not, lenders must make sure the loan meets the Ability-to-Repay Rule. Basically this means the lender made sure the borrower can afford the loan.

Don’t Shop for a Stated Loan – Look for Low Doc

If you haven’t shopped for a mortgage in a while, you might be used to shopping for a stated income loan. These loans don’t exist any longer. You have to verify your income in some manner. You can’t just state your income and let the lender give you a loan. That’s likely what led to the housing crisis. Lenders can’t do that anymore because of the Ability-to-Repay Rule. They must verify your income, even if it’s in an alternative way.

A low doc loan means the lender accepts alternative forms of income verification. Rather than paystubs, you might provide bank statements. In some cases, self-employed borrowers don’t want to supply their tax returns. They have too many expenses written off on them. Because lenders must use your bottom line income on your tax returns, this could hurt your chances of approval.

These borrowers are a great example of alternative documentation. They provide bank statements or Profit and Loss Statements rather than tax returns. Again, the lender can’t sell this type of loan to Fannie Mae or Freddie Mac. But, they can keep it on their books and service it themselves.

What Documents Will You Need?

Different lenders may require different documents. Don’t think it’s a one-size-fits-all approach. Ask each lender their specific requirements. In general, you can expect to supply some or all of the following:

  • 12 months’ worth of bank statements – You’ll need to include all pages of each statement to allow the underwriter to look closely at your deposits and withdrawals
  • Letter from your accountant proving your self-employment as well as how long you have been self-employed
  • Investment account statements for the last 12 months if you use investment income to qualify

These documents are a general idea of what you may need. Again, each lender differs in their requirements. Some lenders take bank statements; others may still want to see your tax returns, even if they don’t use them for qualifying.

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Increase Your Compensating Factors

The best way to ensure that you get approved for a low doc loan is to enhance your compensating factors. These are factors the lender doesn’t use for qualifying, but can use as a “back up.” In other words, they make your loan application look less risky. Here are a few good examples:

  • High credit score – Each loan program has a minimum credit score they allow. But, if you have a score that far surpasses that minimum, it could boost your chances of approval. A high credit score usually means financial responsibility. That’s just what the lender wants to see.
  • Excessive reserves – Your loan program may require a specific amount of assets on hand. If you have money beyond that amount, though, they can be your reserves. The lender counts reserves based on the number of mortgage payments the money can cover. If you have 6 – 12 months’ worth of reserves, you may increase your chances of approval.
  • Low debt ratio – Each loan program will also have a maximum debt ratio requirement. If you have a DTI that isn’t even close to that amount, though, it can help. It shows lenders you aren’t in over your head in debt.

Shopping Around for a Low Doc Loan

Something to keep in mind, the low doc loan is a non-qualified loan. That means lenders aren’t restricted on what they charge. This doesn’t mean you pay through the nose in fees. But, you should shop around. We suggest getting quotes from at least three lenders. This way you know what the norm is for this loan type.

Don’t get caught up in comparing the interest rates alone, though. Look at the fees too. What does the lender charge? Are you paying origination fees? What about discount points? These factors should play a role in your decision.

If you plan to stay in the home for a long time, paying for the lower interest rate might make sense. Paying interest over 30 years can really add up, even if it’s only 0.5% higher. If, however, you know you’ll move in the near future, it might not be worth paying for a lower rate. You might be better off taking the lender with the higher interest rate up on his offer. You’ll pay the interest for a shorter amount of time, so paying slightly more won’t cost too much.

You’ll likely have an easy time finding a low doc loan when you prepare yourself. Make sure you shop around and find the best deal. But, the more organized you are, the more likely you are to get approved. Show lenders that you know what they expect and provide it to them. If you can supply them with compensating factors as well, it can increase your chances of approval.

Don’t forget to compare the interest rates and costs of each loan, though. Don’t jump at the first loan because you are excited to get approved. There are many lenders out there today that cater to the self-employed or non-traditional borrower. Find the one that meets your needs the most and secure the mortgage that will set you up for success.

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Stated Income Loans: Qualified Mortgage

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USDA Income Eligibility (1)Many people think stated income loans no longer exist. Well, not only do they exist they have some new regulations. These regulations were put into place so lenders so they could offer mortgages, however, they have stricter guidelines regarding debt-to-income, proof of income and they got rid of features like interest only payments and negative amortization. These loans are known as Qualified Mortgage or QM. Lenders who choose to fund these loans can benefit significantly. Lenders can sell loans to investors as mortgage-backed securities and offer more protection against litigation in the event a borrower defaults on their loan. These make qualified mortgages a very popular choice and many lenders choose to work with this type of loan more than others. QM loans aren’t for everyone, and some lenders will take the extra step to provide options for borrowers. Some lenders that offer loans won’t require a borrower to provide their income with tax returns, those lenders may be known as alternative documentation loans or alterative-income verification loans.

These loans are commonly known as stated income loans and applicant who attempt to get an approval for these loans do still need to prove they can financially afford the home they are trying to purchase. Many choose to provide the lender with their bank statements. Bank statements can show the lenders exactly how much money is coming in and going out. This helps the lender get a good understanding of the borrower’s cash flow. Bank statements also show the borrowers reserve, meaning, money available to make the house payment in the event income were to be suspended. Lenders typically like to see exceptional credit score, and a borrower’s FICO score should be at least a 700 or higher, but some lenders will accept a score as low as 620. If a borrower can prove they can provide enough income to supplement 12 months’ worth of mortgage payments a lender will usually try to work with them. Applicants shouldn’t expect to buy their property with a low % down. Majority of the time these types of loans are subject to a down payment of at least 20%, but 25%-30% is more accurate. Rates will typically range .50 to .75% higher than those of fully documented QMs.

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Stated Income Loans for Borrowers Self Employed

The standard for QM’s requires that a borrower provide proof of at least 43% DTI (debt-to-income) ratio. This means no more than 43% of the applicant’s gross income can be used for housing expenses. This includes all other obligations the borrower may need to pay for, such as; car payments, credit card payments, student loan payments, etc. This must include the principal amount, interest, taxes, and insurance. Note, that ratios can get confusing for a borrower with higher income and more resources. Some lenders offer “Jumbo Loans” with a 55% DTI ratio, while other will only allow interest only payments. Both options are available to high income borrowers who could get their income in a lump sum like an annual bonus. This loan can allow borrowers lower payments as well throughout the year and larger ones when borrowers happen to have more money.

Finding a Stated Income Mortgage

Even though these loans are slowly becoming more common they certainly aren’t considered “mainstream”. These loans are more likely offered by smaller lenders. Borrowers can research non-conforming loans, not ratio loans, non-qualified mortgage loans or portfolio programs to find which option is best to fit their needs. It’s also a good idea to shop around for your lenders and always compare their programs and costs to find which program, loan, and lender will best fit your situation, want and needs.

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Stated Income Mortgages – Are They Still Available?

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Stated Income Mortgages – Are They Still Available?
Stated Income Mortgages – Are They Still Available_

Stated income mortgages quickly became a thing of the past after the Housing Crisis of 2008. Lenders were no longer accepting the “smoke and mirrors” type lending where borrowers said they made a certain amount of money, when in reality they did not and could not afford the loan. After that crisis, new loan regulations were put into place and it became much more difficult to get any type of loan, which made stated loans null and void. Today, however, they are making a slow comeback but with a different angle – they are not as easy to obtain in order to ensure that these loans are landing in the hands of the right people – the people that can afford them, but they are available to people that can demonstrate responsible use of their money and that can prove their income in other ways, rather than the standard paystub and W-2.

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Qualified Mortgages

The end of the stated income mortgages came about when Qualified Mortgages became a big deal. QM loans are those that are offered to borrowers that can show without a doubt that they can afford the loan being provided to them. Loans that fall under this category have certain characteristics that show your ability to repay the loan. In general, these loans have a debt-to-income ratio lower than 43%, show adequate assets/reserves, and have a great credit score, which means above 700. In addition, these loans do not have periods of interest only payments; balloon payments; or any type of negative amortization – they are straightforward 15 or 30-year loans with standard amortization. These loans cannot have a term that is longer than 30 years or have upfront costs for the loan that are excessive. These loans were the only mortgages seen on the forefront of the lending industry for a while, but this excluded a large portion of the economy as there are many borrowers that do not fit the standard mold, which is when stated income loans started coming back because “rich” people, those with their own company, and those just starting out in life were left in the lurches when it came to buying a house.

Stated Income does not Mean no Qualifications

Today, stated income does not mean that you do not have to prove that you can afford the loan as it did in the past. Lenders are finding ways to prove this with other methods. For example, if you are self-employed and your tax returns do not show adequate income because of the write-offs you use, standard lending will not enable you to get a loan. However, if you have the income and can prove it with bank statements and excellent credit scores, then you will have an easier time trying to convince a lender that you are worthy of a loan because you show a history of paying your bills on time as well as bank accounts with adequate reserves.

Just how much do you need to qualify for a loan today? Every lender will be different with their requirements. Some lenders will need to see at least 12 months of principal, interest, taxes, and insurance in your bank account in order to qualify you for the loan, while others will want more or less than that. As far as credit scores go, many lenders want you to have a score that is at least 700 or higher in order to qualify for a non-income verified loan. In addition, most lenders will not allow a high loan-to-value ratio on stated income mortgages. Instead, they will need to put down a significant down payment, typically at least 20 percent in order to be considered.

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The Reason for the Change

Many people wonder just why lenders would stick their necks out again after what happened with the housing crisis. Shouldn’t lenders only give loans to those that can prove they have the income to afford them? While in reality this makes sense, it leaves the millions of Americans that were forced to leave their employment and become self-employed without the ability to purchase a home. Since this makes up a large portion of the people that would otherwise be purchasing homes, it could hurt the housing industry in the end. These “little guys” need to get out there and be able to purchase a home and they are making a name for themselves; they just might not show it on paper at the moment. This is especially true for those that are just starting out and write off every expense they can on their tax returns in order to decrease their tax liability so that they can keep their income and pay their bills. Since they do that, lenders look at their tax returns and think they make next to nothing, when they do – it just does not show up on paper. Why should these workers be punished after they are doing the economy a favor by producing products/services and generating an income? This is why stated income mortgages have made a comeback with a slight twist.

Big Banks are the Heroes

The biggest problem seen out in the mortgage industry when it comes to stated income mortgages is who is going to purchase them? The secondary market wants nothing to do with these mortgages as they were a large part of what caused the problems in the first place. This is why you will not see the common lenders providing stated income loans, because they do not hold onto their own portfolio – everything gets sold. Larger, private banks however, are keeping these loans in their own portfolio. These are the lenders you need to seek out if you want to get a stated income loan. There might be a handful of private investors that are willing to take the chance and purchase stated income loans, but for the most part it is the private banks that keep them on hand and manage these loans themselves that provide the most success for the self-employed.

Figure out your Compensating Factors

Before you apply for a stated income mortgage, it is important to look at your entire loan profile. Starting with your credit – do you have excellent credit scores? Is your credit history clean, meaning that you have no late payments within at least the last 12 months? These are things the lender is going to look for as they need to make sure that you are not a credit risk at all. Typically a score below 700 by even one point will render you ineligible for a stated income loan. In addition, you will need to prove your worth with your assets. Verifiable bank statements will need to be provided in order to ensure the bank that you have not only enough to afford the loan on a monthly basis, but that you have backup reserves in the event that something were to go wrong.

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Offer Letter Loans

Another version of stated income mortgages that lenders are now able to offer are the Offer Letter Loans. These loans are perfect for those that are changing jobs (relocating), recent college graduates starting their first job, and those that are going back to work after being laid off for a period of time. Offer letter loans work in a similar fashion to stated income mortgages as the lender is relying on the offer letter provided by the employer to qualify you for the loan. There are no paystub or W-2 requirements in order to qualify. There are some strict criteria that must be met however:

  • There must be an offer letter that is non-negotiable or contingent and it must be signed by both the employer and the applicant
  • The job must be starting within 90 days of the loan closing; this must be proven
  • The loan must be for an owner occupied primary property
  • It must be a single family property (home, condo, or townhome)

In addition, the borrower will have to provide proof of adequate assets. The amount required will depend on the length of time between the loan closing and the date the applicant starts his new job. There should be enough assets to cover the principal, interest, taxes, and insurance for the time period that the applicant will not be working in addition to at least 3 months of reserves in the event that something were to go wrong.

As you can see, stated income mortgages are making a comeback, just in a different format than they were once offered. Lenders still need to make sure that they are not providing loans that they know the borrower cannot afford as the lender could find themselves liable for costs that pertain to the violation of the Unfair Lending Practices set forth by the government. Taking extra precautions by asking for adequate proof of reserves as well as requiring excellent credit scores is just the first step in ensuring that a borrower can afford a loan without difficulty.

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