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 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.
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.