Stated income loans are mainly loans for those who are self employed. In the past some lenders didn’t require work history, tax returns, and documentation of income to be approved. These loans were Nicknamed “liar loans”, they were one of the major causes of the housing collapse in 2006/2008. The Dodd-Frank Act was passed a few years later to make sure all creditors verified income on home loan applications, but different versions of stated income loans are slowly re-emerging. Or rather, they’re no longer handed out willy-nilly to anyone, like they were before the market crash. Nowadays, stated income loans are going primarily to those who have trouble securing conventional financing because of the nature of their work, such as small business owners, investors, and those who are self-employed. In these cases, stated income loans can be a viable option if the individuals have the assets necessary to pay them.
What Are Stated Income Loans?
The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010. It requires all mortgage lenders and creditors to verify a borrower’s income and assets on a loan application. Right now, nearly 9 million people in America are self-employed. To qualify for a loan, these individuals usually need to provide lenders with two years of tax returns, which unfortunately, don’t always paint an accurate picture of their financial status or their “take-home” pay. This is because the tax returns for small business owners show income but only after business expenses have been paid. To the lender, it may look as though the owner doesn’t make enough money to pay back a loan, and the application could be denied as a result.
To remedy this, stated income loans have made a small comeback in the mortgage industry. They’re offered by a small number of lenders in the United States, and not by big banks. Instead of using pay stubs or tax returns to verify income, stated income loans ask for a demonstrated ability to repay. One’s ability to repay a loan can be shown through bank statements or proof of assets, normally enough to cover 6 to 12 months of payments.
After proving their ability to repay, small business owners, freelance workers, or investors renting property in the hopes of growing its equity can state their unconventional incomes and be approved for a loan. Landlords may also use stated income loans when managing their many properties. Hopefully, anyone receiving a stated income loan today has shown the lender their ability to repay it, either through brokerage/bank statements or by documentation of assets.
Stated Income Loan Requirements
Stated income loans carry large amounts of risk, so they come with very high down payments and interest rates. They come together in a few days and normally carry fixed rates for the first three years after which borrowers can refinance penalty-free. Some lenders may only approve stated income loans to borrowers who have a credit score of 720 or higher, or who can make a 20 percent down payment. Some lenders even require the borrower to put as much as 30 or even 50 percent down. The more money a borrower can pay down at closing, the less likely they are to default later on, at least in the lender’s eyes. So, it seems a fair trade for not having to verify one’s income. In addition to large down payments, interest rates can be 25 to 50 percent higher on stated income loans than they are on loans with proper income verification.
Helping Veterans Succeed
At Low VA Rates, we understand that building a business from the ground up or being your own boss is hard work, yet extremely rewarding. We’re proud to work every day with some of the most dedicated, productive veterans in the country, and we want to help you and your families in any way we can. If you are self employed and would like more information on stated income loans give us a call at 866-569-8272. Our loan officers are ready and available to provide financial counsel. Let us help you plot a course to home ownership that will be the most beneficial and cost effective for your situation.