When you apply for a home loan, especially in the current mortgage environment,
most banks require that you provide full documentation of your income. You provide W-2 income statements from any payroll employment, 1099's from any income derived from contracted work, recent pay stubs, tax returns and bank statements. All of this provides the lender with proof of your income.
A stated income mortgage loan, on the other hand, allows the buyer to qualify based on the borrower statement of what he or she earns on the application form. With a stated income loan, the lender does not verify the income. No tax returns, pay stubs, bank deposits, W-2's or 1099's are required.
Bill Rayman notes: "Recently, I have become aware of a couple of banks who are venturing out into the stated income market again. The overall loan market is still very tight, even as interest rates remain at historical lows. My ability to find banks that have special rates, products, or underwriting requirements is what separates my mortgage brokerage from others. Here is the scoop on state income loans."
Stated income loans are designed for the many borrowers who have the income
to afford a mortgage and have acceptable credit, but who don't meet
traditional underwriting standards - called full documentation or "full-doc"
that requires applicants show 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, the income they claim might incorporate their
latest increase in salary, which is not yet reflected in documents covering
Stated income loans are popular with many people, but here are just a few of
the types of borrowers who may consider getting a stated income loan:
Lenders do try to determine the reasonableness of the income and generally
employ 3 methods. 1) They consider a borrower's liquid assets - which must
be verified - as a way to "authenticate"
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
roughly 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
Rayman concludes, "As a mortgage broker I actively seek out all the possible methods for getting you the perfect loan to meet your needs.