Stated income loans work best for self-employed individuals since they allow you to apply for a mortgage based on your bank receipts or brokerage statements and on the processor (usually a private investor) understanding that since you’re self-employed your income is likely to be volatile. This route is far easier and happier than trying and failing to persuade the banks to treat you as a traditional worker.
At one time, stated income loans (otherwise known as ‘alternative documentation loans’ “portfolio programs,” “alternative-income verification loans” and “asset-based loans”) were less regulated than now therefore they were – and still are – also called ‘liars loans’ or liar’s loans.
Many a borrower, unintentionally or otherwise, fudged his or her income resulting in his losing the property and falling into bankruptcy. In response, consumer agencies and federal government issued regulations such as the Dodds-Frank conventions to tighten the underwriting process so that lenders have to convince themselves and the government that the borrower can repay before issuing funds. Lenders demand proof of income and evidence of your ability to repay. They are less apt to proceed with handing you the money unless they are utterly convinced that you can afford the transaction and that your fiscal situation is as stated. Otherwise, you may have to look elsewhere or relinquish getting a mortgage for the moment.
Private lenders may check your qualifications in the following ways. They’ll want to see facts such as bank or brokerage statements and FICO scores. Bank statements show your pool of ready and excess money in case your income dries up. FICO scores show your reliability in repaying your debt. The best scores are 700 or higher, though some lenders may consider the 600 range.
You’ll also want to show that your bank account covers at least 12 months or more of mortgage payments. If you’re employed, lenders may want to verify your employment by calling your employer. They may request a CPA letter if you are self-employed.
Like it or not, lenders may also determine according to the kind of work that you do. Your career tells a lot. If you’re a doctor, it’d be normal to state that you make $50,000 a month. But if you’re a freelance writer, underwriters will disbelieve that you’re making $10,000 a month. It may be an undemocratic system – but that’s what it is.
These loans had a bad rap at one time. People could and did overstate their income. These days, it is far harder to do so. All information is doubly and triply checked. You may even find yourself penalized if you distort your data.
Stated income sounds great on paper but may be less appealing in reality. One of its low points is the higher premium that you’re going to pay since your lender is taking his chances in trusting you. For that reason, you’re more likely going to be rewarding him with payments as high as .25% to .50% higher than a full doc loan.
Your stated income loans will also often be accompanied with higher down payments and/ or proof of a high income score. Your FICO indicates your history of paying debts. Your private lender and his team of investors will certainly want to see that!
Terms you’re bound to bump up against
SIVA loans – These are stated income/verified asset loans that allow you to state your monthly gross income on the loan application and requires you to verify your assets by furnishing bank statements or a similar asset document.
‘Non-QM loan‘ – A loan that doesn’t fit the Qualified Mortgage standard, one such rule being a max DTI ratio of 43%.
A SISA loan, or state income/stated asset loan, allows you to state both your monthly gross income and your assets. So in this case, both items are simply stated, and the bank or lender will not ask you to verify the information.
A full documentation loan requires that you verify income with tax returns or pay stubs and also verify assets.
Here’s what you need to know
Most certified private lenders can be trusted. The Dodd-Frank Act has put some regulations in place to protect you. One of these is that lenders have to specify their guidelines, carry state certification and prove your capacity to repay. Otherwise, lenders could be sued for unfair lending practices (called ‘predatory practices’) and be liable for up to three years of finance charges and fees. These, and similar, regulations sound great. Unfortunately, they only apply to residents. Borrowers who are renting aren’t subject to the repay rules and could be talked into mortgages they can’t afford.
For borrowers who can’t document income or who don’t take much salary from their companies, stated income loans may make sense if they can afford them. It also makes sense for people who are most unlikely to qualify for a standard mortgage due to their unpredictable income. Some borrowers, in other words, may have no alternative but to seek out these types of loans.
If you think you may be one of these borrowers, experts suggest that you wait a couple of years until you’re convinced that your income can help you tide these loans. They also urge that you conduct a realistic cash flow projection to make sure you can afford the payments. Or you may want to make your income more stable and apply for a traditional loan.
If you have the money but can’t win the loan know that stated income mortgage lenders are making it possible for borrowers to purchase homes up to $2 million without proof of income, They require a minimum loan amount of $125,000 to borrow from them.
Does that sound attractive?