Non-Qualified Loan

Buying a House With Low Income

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If you have low income, you may think you can’t buy a home. Lenders look at your income, assets, and debt ratio, right? So how would you ever qualify if you don’t make top dollar for your area?

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Luckily, there are programs out there catering to borrowers with a small income. In fact, the USDA program is only for those borrowers with low monthly income. You can actually make too much money and not qualify for that particular program.

Keep reading and we’ll teach you how to take advantage of the programs available for borrowers with little income.

What Does Low Income Mean?

First, we must discuss what low income actually means. No one will be able to secure a mortgage if they don’t make enough to afford the payments. You must have enough income that you can cover the mortgage and your existing debts. You should still have some money left over too. Lenders verify this fact by looking at your debt ratios.

Each loan program has its own debt ratio requirements. They are as follows:

  • Conventional loans – 28% front-end ratio and 36% back-end ratio
  • FHA loans – 31% front-end ratio and 43% back-end ratio
  • VA loans – 43% back-end ratio
  • USDA loans – 29% front-end ratio and 41% back-end ratio

As you can see, each program differs in their requirements. You’ll even find different requirements between lenders regarding the same loan program. Lenders must use the program’s guidelines at a minimum. But, they are free to add to those requirements if they want to tighten up the restrictions on the loans they write.

Low income in this case, means a small income for your area, but enough to cover the debts you must cover.

The USDA Loan for Low-Income Borrowers

The most common low-income loan is the USDA loan. In order to be eligible for this loan, you must buy/refinance a home in a rural area. The USDA sets the rural boundaries, though. You may be surprised to see which areas qualify, as we may not consider them rural.

You must also have a total household income that is less than the allowed amount for the area. Every adult in your household that makes an income must disclose the amount they make. You then total this amount and deduct any of the following allowances that apply to you:

  • $480 for each child under 18 or over 18 and in school full-time
  • $480 for each disabled relative living with you
  • $400 for each elderly person living with you

If after deducting the allowances your income fits within the guidelines for your area, you may be eligible for the program.

Once you are eligible, you must qualify for the loan. This pertains only to the borrower and co-borrower now. You must be able to prove you have the income to cover the proposed housing payment, with a debt ratio no higher than 29%. You must also prove that your total debt ratio doesn’t exceed 41%.

If you meet these requirements and the house meets the USDA appraisal requirements, you are well on your well to securing a USDA loan.

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The VA Loan for Veterans

The VA provides 100% financing to veterans of the military, including those serving in the National Guard or Reserves. You do not need a down payment for this program and the VA doesn’t focus on your debt ratio.

Instead, the VA looks at your disposable monthly income. You have left this money after paying your monthly bills, such as the mortgage, installment loans, and credit card bills. Each area has a specific amount of disposable income required based on your family size.

As long as you have the income to cover your housing payment and existing monthly debts, you may qualify. You don’t have to make a certain amount of money for the program. The size and price of the house are what determine how much you must make to afford it. As long as your total debt ratio doesn’t exceed 43% and you have enough disposable income to meet the VA guidelines, you are in good shape.

The FHA Loan

The FHA program is also great for borrowers with low incomes. This is another government-backed loan program with flexible guidelines. The FHA requires borrowers to have a maximum 31% housing ration and 43% total debt ratio.

You do need a down payment for FHA loans, but only 3.5% of the purchase price. If you bought a $150,000 loan, you’d need $5,250 down. But, the FHA does allow you to accept gift funds from relatives, friends, or even your employer. The seller can also help you with the closing costs. It’s possible to come to an FHA closing with no money and still walk away with keys to your new home.

Don’t make the mistake of thinking you can’t buy a home if you have low income. Several programs cater to buyers just like you. The key is to shop around and find the best deal. Talk to lenders about the different programs that apply to you. This way you can receive quotes for each program, allowing you to choose the loan that works best for your financial situation.

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Qualification Requirements for Stated Asset Loans

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If you need an alternative document loan, you will have to meet certain requirements. First, you will need to find a lender that is even willing to write this type of loan. After the housing crisis, most lenders pulled out of the stated income/stated asset arena. They didn’t want to take the chance of dealing with defaulted loans.

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Today, though, more and more lenders are willing to write stated assets loans. Just how do you increase your chances of approval on one? Keep reading to find out more.

Have a High Credit Score

First, you need a high credit score. If you want a lender to take your word on your income or assets, you have to give them reason to do so. Think of the difference between a borrower with a high credit score and one with a low credit score.

The borrower with the high credit score probably manages his money correctly. He doesn’t overextend his credit or pay his bills late. Lenders look at him as a good risk. The borrower with a low credit score may not manage his money correctly. He may overextend his credit or pay his bills late. His credit history is typically filled with negative information that makes a lender wary of giving him a loan.

If you think about the risk of a lender offering a stated income or stated asset loan, they are taking your word for what you make or have. They take a much larger risk doing this for a borrower that doesn’t have a decent credit history. Making sure you have a high credit score before you apply for this type of loan can increase your chances of approval.

Have a Low Debt Ratio

A low debt ratio goes hand-in-hand with a high credit score. The more debt you have outstanding, the higher the risk of default you pose to a lender. You may find that it’s harder to find a willing lender when you have a high debt ratio.

This doesn’t mean that you can’t have any debt outstanding, but you should try to minimize the amount you have outstanding before you apply for the loan. If you have credit card debt, try to pay the balances off in full. If you aren’t able to pay them off in full, at the very least, try to get your balances paid down enough so that they are less than 30% of your total credit limit. Once you owe more than 30% of your credit limit, it’s a red flag to lenders, making them less likely to give you a loan.

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Have Stable Employment

Even if you are applying for a stated income loan, you still need to prove your employment. Lenders want to know that you have stability and reliability when it comes to your income. The longer you are at your job, the more stability you show a lender.

Ideally, you should have at least 2 years at the same job. This shows lenders that you are consistent with your efforts to stay at your job. It also gives you room for raises, putting you in a better financial situation moving forward. If you don’t have a 2-year history at the same job, you’ll need to explain why you made changes. Did you better yourself by taking a higher position? Did you go back to school to start in a different industry?

Your lender will need to know the exact reason you changed jobs so that they can gauge your ability to be successful at the new job. Since your job is the source of your income, your lender will need to make sure beyond a reasonable doubt that you are able to succeed in your chosen profession.

You can increase your chances of getting a stated asset loan by making sure all qualifying factors go above and beyond what the lender wants to see. Just meeting the basic guidelines isn’t enough. Lenders need to know that you are a good risk and that you don’t pose a high risk of default.

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Using Overtime Income for Mortgage Qualification

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Do you work overtime every now and then? Do you need that money to help you qualify for a slightly larger mortgage or maybe a mortgage at all?

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The good news is that you may be able to use your overtime to qualify for a mortgage. The bad news is that you must meet certain requirements in order to do so.

The Length of Time

First, you can’t use overtime that you just started receiving. Just like your regular income, lenders need to see a history of receipt of the income. Just how long you must receive it will depend on the lender. Some lenders allow the use of overtime income that you’ve received for just one year, while others make you wait two years.

What’s the difference and why do you have to wait so long? It has to do with consistency and reliability. If you only work overtime once in a while and it’s not a consistent thing, lenders won’t use it to qualify you for a mortgage. They can’t rely on it if it’s not something you receive on a regular basis. On the other hand, if you have been working overtime for the last two years, lenders can see a pattern, and figure out how much overtime to include in your qualifying income.

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Consistency of Your Overtime Income

Lenders need to see consistency in your overtime income over a period of months or years. What they want to see is stable and/or increasing income. If your overtime income seems to wane after a few months or there was a decrease from one year to the next, they may not be able to use it to qualify you for the loan.

Calculating Your Overtime Income

First, your lender will need to figure out which portion of your income is overtime. Using your W-2s or tax returns won’t suffice. While these documents show your total income received, they don’t break it down between regular and overtime income.

Instead, lenders will use your paystubs. Typically, you have to provide two paystubs, but you may need to provide more so that they can see the pattern of receipt of overtime income. Once the lender sees which income is overtime income, they will average the receipt over two years or however many years you’ve been receiving it. This allows lenders to account for the highs and lows. In other words, they can account for the times that you work overtime and the times that you don’t work overtime.

If a lender were to qualify you based on a recent period when you worked a lot of overtime, but you don’t have a history of working that much overtime, it could turn out bad in the end. If you become unable to afford your mortgage payment because the lender qualified you for too much, it could result in the loss of your home. If the lender uses an average, though, they can rest assured that they found the ‘happy medium’ and qualified you for a loan that you can afford.

Proving Continuance

One other large piece of the puzzle is proving the continuance of the overtime income. While no one can predict the future, lenders need to know that your overtime will continue for the next three years, for as far as they can see.

You can obtain this proof from your employer themselves. They need to complete what’s called a Verification of Employment. This form acknowledges your dates of employment as well as your income. On this document, your employer must state that your overtime is likely to continue for the next few years. While your lender realizes things can change, they need that reassurance from your employer in order to use your income.

Using overtime income is possible when all of the pieces of the puzzle fit. Talk to your lender about your overtime income and give them as many details as possible about it. The more they know about it, the more accurate an answer they can provide you for your loan.

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Which Non-QM Loan Product is Best for You

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Which Non-QM Loan Product is Best for You

There are a variety of Non-QM loan products present in the market. Depending on the borrower’s needs and current situation, one product may help you get the needed financing.

Here are some of the loan products under the Non-Qm territory.

“Beyond-30” Mortgage Loans

This is primarily because of how Qualified Mortgage loans are defined. The regulatory reforms do not allow loan terms that go beyond 30 years. However, there are many consumers looking for a loan with a term stretching as far as 40 years.

If you total the payments in the span of 40 years, you may realize that you are paying a huge interest. Although this is such a long stretch, loans of such kind are still available in the market because they make very low monthly payments possible.

Stated Income Loans

Declare your income and they’ll take your word for it. It’s the basic premise of Stated Income Loans. However, it does not necessarily mean though that you do not provide any document to show your income.

In the QM world, your income has to be fully documented. There is a standard verification and underwriting procedure that needs to be done. Many Americans cannot provide all these papers, and so they won’t be eligible for a QM loan. If this is the case, a stated income loan will work best for them.

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Negative Amortization Loans

Amortization is defined as paying off the loan interest and principal through regular payments. Negative amortization is when you do minimum payments that do not pay off the interest. In the end, this interest will continue to add up.

The unpaid interest will be added to your principal. On the next month, the interest rate will then apply not only to your principal but to the unpaid interest as well.

Although this is not a popular choice for many, there is still a market for this kind of loan.

Jumbo Loans

There are individuals who need extremely large financing. Conforming loans have limits to the amount a borrower can borrow. But because there are some who need and can very well afford to pay such a large amount, jumbo loans are originated by lenders.

It is designed to provide financing for high luxury properties. Because jumbo loans exceed conforming loan limits, they cannot be purchased, securitized or guaranteed by Freddie Mac or Fannie Mae. And because of the huge money involved, there are special underwriting procedures and requirements. Tax implications are also different for this loan product.

Interest-Only Loans

One of the most popular Non-QMs is the Interest-Only loan. Simply put, you pay only the interest in the given term which is usually 4 to 7 years. After this term, you will start paying the principal.

The borrower can then choose to pay off the principal, pay a lump sum, or refinance the loan.

There are many loan products under the Non-Qualified Mortgage bandwagon. What is important is to study your situation and your repayment ability and find the right product for you. Speaking with a lender will help make the search faster.

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What’s the Deal with Self-Employment Income?

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What’s the Deal with Self-Employment Income?

We have often heard of self-employed individuals and their troubles getting traditional mortgage products. With the write-offs and deductible expenses their self-employment income can be allowed of, the figures on paper look smaller and cast doubts over their ability to repay their mortgage. Things could get more complex if their self-employment history spans less than two years.

This discussion only makes one curious of the nature of the self-employment income. Who are the self-employed? What kind of taxes are they paying or the deductions they are getting? Let’s look at this type of earned income below.

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Are You Self-Employed?

You are considered self-employed by the Internal Revenue Service if you are one:

  • Who carries a trade or a business as an independent contractor or a sole proprietor.
  • Who maintains a membership in a partnership conducting a business or trade.
  • Who is engaged in a trade or business for profit on a full-time or part-time basis.

Tax Obligations

Your tax obligations as a self-employed individual consist of an income tax and self-employment tax, which is basically your Social Security and Medicare tax. The components of this self-employment tax are similar to the taxes withheld from wage earners.

You are to file (i) a tax return annually and (ii) an estimated tax paid quarterly.

To know if you are required to pay both income and self-employed taxes, determine first your business’s net loss or profit. Subtract your business expenses from your business income:

  1. If your expenses are greater than your income, this results in a net loss. This can be deducted from your gross income, subject to limitations.
  2. If your expenses are less than your income, this results in a net profit. This forms part of your income.

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If your net earnings as a self-employed are at least $400, then you are required to file an income tax return on Form 1040. But if these earnings net less than $400, you are not required to file Schedule SE to Form 1040 subject to you meeting other filing requirements.

Meanwhile your estimated tax covers your (i) income tax and (ii) Social Security and Medicare taxes that may have been otherwise withheld by your employer. Use the Form 1040-ES to figure out your estimated tax payments.

For your annual tax return, you will use:

  • Schedule C is for reporting income (or loss) from your business, or
  • Schedule C-EZ is for reporting business expenses of $5,000 or less and so on.

The aforementioned Schedule SE is also used to report your Social Security and Medicare expenses.

Allowable Deductions

A self-employed individual is required to report all his/her income and claim all of his/her allowable deductions from expenses.

One deductible is the expenses you incur in using your home for business. This is called the home office deduction that is applicable to homeowners and renters and all types of homes.

Self-Employment Income and Non-Qualified Mortgages

The hurdles faced by the self-employed because of the nature of their income have been remedied partly by non-qualified mortgages whose guidelines vary lender to lender. One lender may not verify income as in stated income loans, another may base verification on liquid assets, and another one could forego tax returns in favor of bank statements.

However the lender considers your income, your loan application is hinged on your source of monthly mortgage payments, your self-employment income being that. Be responsible in keeping records of your income and expenses so it’s easier to document how much you make.

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A Roundup of Mortgages for Today’s Self-Employed

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It’s not that they don’t have adequate income/assets to take on a mortgage. It’s just that self-employed borrowers can’t show in pay stubs, Form W2s, and sometimes tax returns their ability to repay their loans. There are a number of mortgages that are made for or admit the self-employed professionals of today. Here’s a non-definitive list of loans starting from those requiring no income verification.

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Option 1: No Income Verification Loans

Also known as no doc and stated income loans, these mortgages are underwritten based on your credit score, employment history, and down payment. Credit scores required can be in the 700 range and equity at 40%.

Lenders will verify your self-employment and in lieu of W2s and pay stubs, your personal and business bank statements good for a year. These bank statements should match your income statements.

With the financial regulatory reform of recent years, stated income loans are not the liar loans of the past. Their documentation may not be full but lenders compensate it with other factors as mentioned above.

Option 2: Bank Statement Loans

These loans are akin to stated income loans, requiring a 12-month history of individual and/or business bank statements. LTV can be between 75% and 80% as it varies per lender.

Typical requirements are business license and related permits, tax returns and tax return transcripts. There may be other requirements that depend on, among other things, the length of your self-employment history, e.g. two years or less.

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Option 3: Conventional Loans

While loans sold to GSEs Fannie Mae and Freddie Mac require full documentation (they still do), they have loosened up their guidelines for the self-employed.

For Fannie Mae’s part, a self-employed borrower’s income can be verified using his/her individual or business tax returns or both for the past two years, as applicable. The self-employed borrower, which is defined by Fannie as “ any individual who has a 25% or greater ownership interest in a business,” will need to show two years’ worth of prior income as proof that this source of earnings will likely continue. Those who have been self-employed recently may provide their latest federal tax returns.

Back in September, Freddie Mac introduced a pilot program for first-time homebuyers with low income and alternate income sources like self-employed professionals.

Option 4: FHA Loans

Two years seems to be the “magic” number for mortgages for the self-employed as FHA loans also require that you should have a steady flow of self-employment income for the last two years. This will be shown by duly signed and dated tax returns and schedules for the past two years. Income statements and balance sheets are also required.

Take note that the FHA requires full documentation but the perks can be worth it. For one, your down payment could be as low as 3.5% depending on your credit score.

These are just some options that you can look into when shopping for mortgages. Lenders may offer you other options, talk to one today!»

What are the Types of Non-QM Mortgages Available Today?

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Mortgages today are classified into two categories: qualified, and non-qualified. Qualified mortgages are designed to cater to individuals who can fully demonstrate their ability to pay back a loan. But a significant part of the American population does not fall within this category. Most businessmen or self-employed individuals, as well as freelancers or those who do not receive a steady stream of income may find it hard to qualify. This is where non-qualified mortgages come in handy.

Non-qualified mortgages (Non-QM) come in different forms, and target a different segment of the housing market. Let’s look into its variety.

Interest Only Non-Qualified Mortgage Products

With interest-only loans, you pay only the interest on the loan for a specified period. After this period expires, you are then liable to pay for the interest AND the principal, which could cause your monthly payments to balloon. If you are going to take this type of loan, be sure that you are well-prepared and have money to tap into by the time the interest-only period comes to an end.

Investment Property Loans

Investment properties are treated by the housing industry as business. Hence, loans for these properties do not have to abide by the rules set by the Dodd-Frank Act. This secures the variety of the type of financing an investor or borrower can get. Different lenders may have different sets of qualification guidelines for potential borrowers.

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Loans for High Net Worth Borrowers

Banks offer big loans for individuals whose net worth are significantly high. These individuals usually do not have a consistent income but do have a significant number of assets on their name. Thus, many banks offer loans that are based on assets rather than income. These assets must be verified (in lieu of the income) in order to qualify for the loan. These asset-based loans typically loan thousands of dollars or even millions to qualified individuals. However, borrowers must be able to maintain excellent credit and put a good percentage of the loan amount as down payment.

Non-Agency Mortgage Programs

Conventional, qualified mortgage lenders will deny your loan application if your debt-to-income ratio goes beyond the 43 percent limit. This poses a problem if you are receiving irregular income or are purchasing a property with a high loan amount. Thus comes non-agency mortgage programs to your aid. Through a non-agency mortgage, you can get around the 43 percent DTI cap and secure financing for your home. However, you must be able to demonstrate to the lender that you will be able to pay back the loan. Do not take a mortgage that is more than you can afford. Make an honest evaluation of your income and prepare to deliver.

Stated Income Loans

If you are having difficulty documenting your income, but need a home loan, you can opt for stated income loans. These types of loans target self-employed individuals. For stated-income mortgages, lenders do not look at your pay stubs and W2 forms as well as your income tax records. You just need to state your income and they take your word for it. Because of this, stated income loans are deemed risky and most of them has been eliminated especially after the housing crisis hit in 2008. However, there are still versions of stated income loans that exist. One of these are asset-verified loans. Compared to some of its predecessors, they have stricter guidelines and qualification requirements.

To get asset verified loans, your asset must be reflective of your income. Moreover, you must have money on your account that is enough to cover the loan expenses should something disrupt your income flow. Qualifications depend from one lender to another. But one thing is made sure: that you can afford to pay for the loan despite vague income records, and that you will be able to pay back what you owe.

If you are looking for financing but do not fit the traditional eligibility and qualification standards required by lenders, non-qualified mortgages could be your saving grace. However, these loans are risky and there are frauds who are always ready to pounce on the unsuspecting. When you head out shopping, make a criteria for your lender, and always be on the lookout for non-credible transactions.

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What is a No-Income-Verification Loan?

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What is a No-Income-Verification Loan?

Today, a no income verification loan differs from what it used to be before the housing crisis. Rewinding to 8 to 10 years ago, a no income verification loan meant that you did not have to provide anything but great credit to a bank in order to obtain a loan. After the housing crisis and the overabundance of foreclosures on the market, those loans became a thing of the past. Today, they are slowly making a comeback, but they are much different than ever before.

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What does No Income Verification Mean?

Today, no income verification means that you are more than likely self-employed and cannot easily verify your income. If your tax returns show a much lower income than you make today, you might be eligible for this type of loan, assuming you have excellent credit. Lenders need some type of reassurance that you are a low risk – they cannot just hand out a loan without full verification of your income without knowing that you are financially responsible. Today, no verification of your income means that you either do not provide your tax returns, but rather provide asset statements and excellent credit. In some cases, however, it could mean that the lender asks for access to your tax transcripts via an executed IRS Form 4506.

What Type of Equity Must you Have?

The best way to get approved for a no income verification loan is to have a large amount of equity in the property. This can mean one of two things:

  • If you are purchasing a property, you need to be able to put a large amount of money down on the home. This means more than 20 percent, which is the standard requirement; it means closer to 40 percent if you want a bank to take you seriously.
  • If you own the property and need to refinance, you need to have at least 40 percent equity in the home in order to qualify in most cases.

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Employment still Verified

What no income verification loans does  not mean is that the lender will not verify your employment. You must be employed or self-employed and be able to verify it. If you are employed, you must work on commission or mostly bonuses if you want to use the no income verification loan. Otherwise, it would be like lying on your application if you do not want the lender verifying your income. On the other hand, if you work on commission or bonus, your tax returns could report a much lower amount of income than you actually make because of the number of expenses and other write-offs you take advantage of in order to lower your tax liability. In this case, the lender can verify your employment, rather than your income.

If you are self-employed, the lender can still verify your employment. This can be done in one of two ways:

  • Provide your license to operate the business – If your business requires any type of specific licensing, you can provide it to the lender for proof of your business. Typically, the lender will require a little more verification as well, such as receipt of income from the company in your bank account or even bank statements from the company in your name.
  • Provide a letter from your CPA – The best way to verify your self-employment is by providing a letter from your CPA on his letterhead. The CPA must state that he handles your finances for the business and that you are in fact, in business for yourself.

Compensating Factors are Important

One of the most important things you can do for yourself when you try to obtain a no income verification loan is to have compensating factors. The given requirements include excellent credit and adequate equity in the property. Beyond that, however, you can provide the lender with other reasons to take a chance on you. These compensating factors can include any of the following:

  • A housing history with no late payments in the past few years. This shows your financial responsibility towards your housing liabilities.
  • No collections or judgments on your credit report to further your ability to show your financial responsibility.
  • Reserves on hand in your checking or savings account that equal 6 to 12 months’ worth of mortgage payments also show financial responsibility.
  • Long-term employment that you can verify. The longer you have been at the same employer, the less risk you pose to the lender.

The bottom line is that you have to look at the entire picture when it comes to applying for a no income verification loan. You cannot expect that just because you have good credit that you will get approved. The lender will need to see an entire financial picture that shows responsibility and very little risk. The best way to do this is to borrow as little as possible, which means saving up in order to have a large down payment or waiting until you have extensive equity in the home that you own before you refinance. In addition, the more stability you can show with your employment, whether you work for someone or yourself, can further your likelihood of getting approved. The more compensating factors you have to make up for the fact that you cannot fully verify your income, the better. In some cases, borrowers can replace their standard income documents with asset statements, showing receipt of the income, while other times, even that is not possible.

Whatever the case may be for you – embrace what you have and showcase the positives to a lender. The more you work on your credit and your savings, the better time you will have with any lender. The good news is, however, that there are plenty of lenders out there that are handing out no income verification loans today – you just have to be able to appeal to what they are looking to fill. If one lender turns you down, do not give up – keep shopping until you find a lender that your attributes meet.

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Do I Have to do a Stated Income Mortgage if I’m Self-Employed?

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Do I Have to do a Stated Income Mortgage if I’m Self-Employed?

You might have heard of the stated income mortgage as being a “ self-employed” person’s mortgage, but in reality, it is not the only way for self-employed borrowers to get a loan. The only reason that borrowers that work for themselves must use a stated income mortgage is when they cannot fully verify their income. This is usually due to the fact that these borrowers write off a great number of expenses on their tax returns in order to lower their tax liability. While this helps in terms of paying their taxes, it makes their income look lower to the lender, making it hard to qualify with a higher debt ratio and low income. If on the other hand, your self-employment is fully verifiable, you are more than welcome to apply for a fully documented loan, just be aware that you will have to provide all schedules of your tax return in order for the lender to properly determine your average income. Typically, lenders take a two-year average of self-employed income, which means if the year before last year you had a rough year, yet last year was great, the average income will be lower than you anticipated the lender using.

What’s the Difference Between the Mortgage Types?

There are a few differences between the stated income mortgage and a fully documented mortgage. They are as follows:

  • The most obvious difference is the way you verify your employment; with the stated income loan you do not verify your income and with a fully verified loan, you document your income
  • The interest rate is typically higher on a stated income loan because it poses a higher risk to the lender, which means a higher interest rate
  • There are fewer lenders that offer the stated income mortgage than offers fully verified FHA, VA, or conventional loans

Both mortgages enable you to purchase a home and give the same types of terms, including 15, 20, or 30-year fixed terms as well as several adjustable rate terms. The largest difference, in the end, is usually the interest rate and the fees charged.

What does the Mortgage Lender Need?

If you are self-employed, you will need to provide the lender with different documentation than you would if you were a salaried employee. Typically you will need to provide the following:

  • Tax returns for the past two years
  • Bank statements for the last 12 months for both personal and business accounts
  • Letter from your CPA verifying that you are in business for yourself
  • Proof of the license for your company
  • An executed IRS Form 4506

The lender will take these documents and evaluate your income to determine if you qualify for a fully documented loan. The income will usually be taken as is, meaning the bottom line after you write off all of your expenses, but there are some exceptions to the rule:

  • Depletion
  • Depreciation
  • Large expenses that are non-recurring

If you have any of these expenses written off on your taxes, you might be able to add them back into your income, to help make your income higher. This is one of the reasons you should always talk to your lender about your ability to use a fully documented loan – if the lender allows specific expenses to be added back into your income, you might qualify for a fully documented loan, saving you plenty of money down the road.

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How you can Plan

The good news is that you can plan ahead for your desire to obtain a mortgage. This is especially important if you are self-employed. If you know that you plan on purchasing a home in the next year or two, consider your choices for tax filing this year. While you might save some money on your tax liability, you will likely pay the price by having to take on a stated income loan, which means more fees and a higher interest rate. It pays to do the math ahead of time. If you plan on staying in your home for a long time, you will want to do whatever you can to obtain a low-interest rate. In some cases, this could mean lowering the amount of write-offs you take in order to maximize your qualifying income. The higher your income, the more likely it is that you can use a fully documented loan, rather than a stated income loan.

Another way to plan is to start saving as much money as you can. The higher the down payment that you have, the lower risk you pose to the lender. In addition, once you put the desired down payment down, if you have reserves on hand, you can use them as a compensating factor to help you qualify for the loan. Even if you have to take a stated income loan because your income does not look high enough on your tax returns, having six to twelve months’ worth of reserves on hand helps to lower your risk. This means that the lender will likely be able to provide you with a lower interest rate, saving you money in the long run.

Talk to your lender to see what you might qualify to receive given your self-employment income. If you draw a salary on a regular basis, it might be easier to qualify, but even if you do not, there are ways to maximize your qualifying income so that you can use a fully documented loan. If you must take a stated income loan, just make sure to shop around with different lenders. Some lenders will be able to take higher risks and not have to change you as much as other lenders charge. Remember, you can always negotiate different fees and interest rates as well – do not just settle for the first quote you are provided, you have the right to shop around and negotiate until you get the terms you think are most affordable.

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Is a Stated Income Loan Suitable for Your Situation?

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Is a Stated Income Loan Suitable for Your Situation

Stated income loans used to be so commonplace prior to the housing crisis. Since then they pretty much disappeared for many years. This left people with less common methods of income production without home loans because they could not meet the requirements of conventional loans, especially their new stricter standards. The Dodd Frank regulations made things even more difficult for these borrowers as every loan now needs to pass the Ability to Repay Rule in order for banks to be protected from litigation as well as to be able to sell the products on the secondary market. Since the economy has made a comeback, however, a few lenders have dabbled in stated income loans again. They are not the loans you would have found in the market a few years ago, but they are still a great way for the self-employed or commissioned borrower to get a home loan.

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Credit Guidelines

Credit scores are often the bane of existence of mortgage programs. If you don’t have the minimum score, you can count yourself out of the program. This is not necessarily the case for state income loans; however, you do need to have good credit in order to qualify. What good credit means depends on which lender you are talking to, though. Because stated loans pose a greater risk to the lender because the loan must remain on the books of the lender providing the loan, any way that the lender can minimize your risk of default, they are going to take. The easiest way to do this is to limit the number of low credit scores they allow. As a general rule, lenders require a credit score of at least 700 to qualify for the program. As with any program, however, there are exceptions. If you are able to make up for the lower credit score with excessive reserves (more than the required 12 months); a large down payment; and minimal current debts, you might be able to get away with a lower credit score.

Income Guidelines

It might seem out of the scope of the program to require borrowers to verify income in order to qualify for stated income loans, but it is a necessity as that is what got banks in trouble in the first place. It is one thing to provide a loan that allows a borrower to state their income and verify it with alternative documents rather than a standard paystub, W-2, or tax return. What got the industry in trouble was the lack of verification these loans had before. Borrowers were able to state their income and get a loan based off of that if they had the credit score to back them up. Today, these loans with the same name, have a completely different verification process. You still have to be able to verify your income, but it can be with a different document, such as your bank statements. While the lender will not see a deposit from XYZ Company every two weeks for your paycheck; they will be able to see a pattern in your deposits and withdrawals over the period of a year or two. This enables the lender to see how much money you bring in and pay out; helping them to determine if you can in fact, afford the new mortgage.

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Down Payment Requirements

How much you put down on a home purchase helps to dictate its risk level. The less money you put down, the less you have invested in the home. If you were to run into financial difficulty down the road and have little invested in the home, then you could end up giving up on the home, leaving it in the hands of the bank. This is a large reason why lenders require large down payments for stated income loans. Typically, 30 percent is the minimum, but you will find different programs with every lender. Your credit score, amount of stated income, and the purchase price of the home will help to determine what level of a down payment the lender will be willing to accept. Remember that the more you are willing to put down, the less risky your loan becomes.

Investment Home Requirements

One area that the Dodd Frank regulations do not hit is with investment homes. Owning an investment home is considered a business, rather than anything else. This means that the same rules do not apply to you, enabling you to obtain this type of loan for your real estate investment business. As with any owner occupied property, however, you will have to prove your worthiness for the loan. You cannot just state your income and the fact that you plan to purchase the home for investment and get it – you have to qualify for it with good credit, plenty of reserves, and verifiable income in your bank statements. Because the Qualified Mortgage guidelines to not apply to you, this loan could be sold on the secondary market, enticing more lenders to provide investment home loans for qualified borrowers.

As is the case with any loan, there are restrictions on who qualifies. Banks today want to be much more careful than ever before in order to avoid the chance of homes being foreclosed upon. Contrary to popular belief, banks do not want to take possession of a home; they would rather find a way to get the borrower to be able to afford the payments. When a bank has to take a home back it takes up a lot of their resources, not to mention funding. All lenders today will be careful who they provide stated income loans to, but at the very least, they are a great way for people that were forced to become self-employed or to take on a commissioned job to become home owners once again after they get their finances in order and are able to prove their worthiness in other ways than the standard income verification that most loans require.

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