stated income loan Archives - Non-Qualified Loan

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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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.

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.