Wednesday, December 7, 2011

Major Change in Mortgage Loans: Banks Offer Stated Income Loans Again


What is a Stated Income loan? What does it take to qualify for a Stated Income loan? How does a Stated Income Loan Compare to a Full Documentation loan?
Who is most likely to need a State Income loan?

Recently, I have found a few banks who are venturing into the Stated Income market again. Overall, the loan market is still very tight even as interest rates remain at historical lows. My ability to find banks with special rates, products, or underwriting requirements is one of the features that distinguishes my mortgage brokerage. Here is the scoop on Stated Income loans.

When you apply for a home loan, especially in the current mortgage environment, most banks require you to provide full documentation of your income. You provide W-2 income statements and pay stubs from any payroll employment, 1099's from any income derived from contract work, tax returns and bank statements. All of this provides the lender with proof of your income.

In contrast, a Stated Income loan allows a borrower to qualify based on the income a borrower states on the application form that he or she earns. With a Stated Income loan, the lender does not verify the income. No tax returns, no pay stubs, no bank deposits, no W-2's or 1099's are required.

Stated Income loans are designed for the many borrowers who have the income to afford a mortgage and who have acceptable credit, but who don't meet traditional underwriting standards - called full documentation or "full-doc" loan - which requires them to prove that the income they claim was actually earned in each of the two prior years.

Self-employed borrowers usually have the most trouble meeting this requirement, and Stated Income loans were originally designed for them.  But many applicants with incomes from salaries also have trouble meeting the full-doc requirements. For example, their income might incorporate an increase in salary which is not reflected in documents covering prior periods.

Stated Income loans are popular with many people. Here are some of the borrowers who may consider getting a Stated Income loan:
✓              Self-employed people who own a small business
✓              Highly commissioned people who may have a low base salary but make most of their income on commission
✓              People who can't document at least 2 years of income at their current income levels
✓              People who make plenty of money but don't want to disclose their income

Lenders do try to determine the reasonableness of the amount of income stated and generally employ three methods to do so.  1) They consider a borrower's liquid assets - which must be verified - as a way to "authenticate" the amount of income stated.  If a borrower says they make $X per month, the lender expects to see at least 12 times X in the bank.  2) Another test is that the income stated must be consistent with incomes earned in the type of business or line of work in which the applicant is involved.  3) Lenders often require a self-employed borrower to prove they've been self-employed in the same business for two years as verified by a CPA letter or business license.

Be aware that some lenders require that the stated income borrower execute an IRS Form 4506-T which authorizes the lender to request IRS verification of the figures in the borrower's tax returns. Lenders don't ordinarily check the returns, but the possibility that they might is an inducement to report income truthfully.

As a mortgage broker I actively seek out all the possible methods for getting you the perfect loan to meet your needs. I have identified at least four lenders who are currently offering Stated Income mortgages. If you fit into this category or have a friend who does, please give me a call. There is no cost or obligation for the consultation.

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