Stated Income Loans

Now You See Them, Now You Don't: Stated Income Loans

Over the last few months, we at First Central Mortgage Funding, have received many requests to explain stated income loans, what they are and how they work. We have also been asked if these types of loans are still available and to bring clarity to the current state of affairs regarding stated income loans.

Generally stated income loans are a type of mortgage in which the borrower is not required to verify the their personal or business income to the lender through documentation such as pay stubs, income tax returns, or W-2 forms. In unorthodox stated income loans, borrowers are only asked to state their income and they make a good faith statement.

When Would You Benefit from Stated Income Loans?

Self-employed borrowers are ideal candidates for stated income loans. Of course those who might have difficulty organizing income documentation. Stated income loans have been approved to clients with a range of credit histories, which includes subprime borrowers. Unfortunately the lack of verification often makes these loans scam targets.

First Central Mortgage Funding is in favour of loans that fill financial needs including situations where normal loan standards wouldn't be approved. The rule of thumb is that a customer's mortgage and other loans should not add up to more than 45% of a person's income. This would appear like the sensible course of action for a person who now owns a home. Conversely, an investor may have many properties and for each one may receive just a small amount more than their loan payments per property, but end up with $320,000 in income considered disposable. Nonetheless, non-stated income loans would decline this individual since their debt to income ratio does not line up.

Self-employed businessmen who borrow, and who have a fully documented loan would include the borrower's debt into their own debt for their income calculation. Stated income loans can also assist borrowers when loans with complete documentation normally don't think of the source of income as having reliability or stability. Also a properly documented loan does not consider potential future income increases.

Are Stated Income Loans Available at This Time?

First Central Mortgage Funding recalls that in 2008 there was potential for a couple with a five-one ARM on their residence adjusting in two years. If they wished to refinance into a 30-year fixed-rate loan while walking away from two investment properties they wouldn't be able to refinance in their own name. They could refinance in the wife's name only, but they would have to be stated-income loans if she was a student or unemployed. This couple could have shown a healthy amount of cash in the bank. Suppose the loan amount is about $800,000. Could this couple have gotten a decent rate at that time?

Well, yes, since at that time stated-income loans and no-verification loans were available at reasonable terms.

In 2008 this couple would have been able to find stated income loans along with verified assets at any number of small savings-and-loans. The rates are surprisingly close to a fully documented program but the rate would have been somewhat higher than a fully documented loan and the maximum loan-to-value ratio is usually 75%. Loan applicants must have two years of continuous employment.

We are finding increasing demand and queries as to whether state income (or no verification) loans will be continue to be available as they have in the past.

Are We Seeing the Return of the No Verification Loan?

There are pros and cons related to stated income loans.

The Pros:

Self-employment - This can be an ideal loan for self-employed people. If you are self-employed, it may be difficult to fully document a standard income. You may earn a lot one month only to follow it with very little the next. It may prove difficult to convince a traditional lender that you should be considered a good risk. For self-employed people, it represents an opportunity to own a house without having to acquire a regular job.

Quick application procedure – It is usually faster to get your money with stated income loans. When you apply for a standard loan, they have to review the loan on top of verifying everything about it with your employer and so on.

This is all your own decision making - With a standard loan, banks try to make your financial decisions on your behalf. They use many complicated ratios and formulas in order to justify a loan amount. One such example: if you are purchasing a duplex, they will only let you count a portion of the projected rental income in your income. However, with stated income loans, you need not be concerned as to whether the bank thinks you can afford them.

The Cons:

Higher interest rate - Owing to the hassle-free good faith extended to you, you will generally have a higher interest rate on your loan. The lender is undertaking a bigger risk load by extending this type of loan to you. Therefore, they are compensated accordingly for the risk that they are taking.

Higher chance of default - While they are loathe to admit it, it does happen that the bank does know what they are doing in the approval process. They have many statistics to back up their decisions as to whether to lend or not. When you apply for stated income loans, you are eliminating all kinds of built-in protection mechanisms. When you show them your income, debts, and credit score, they are basing their decision to lend on others in your same historical situation. If they have doubts that you can handle the obligation, then you really ought to listen to them. With stated income loans, you rule out that benefit and can sometimes get in over your head.

Are Stated Income Loans becoming extinct?

Due to market conditions stated income loans are not always available. These loans were largely designed with self employed borrowers in mind, to assist them in reducing the amount of paperwork required for the approval of a loan. Lenders through tradition have placed more weight on a borrower's credit rating and assets when deciding the consumer's ability to repay a loan. Similar to other high risk loan products, stated income loans have been taken advantage of by consumers and also mortgage professionals. We have noted the historical trends towards high default rates and the termination of stated income loans.

As we have stated above, there are pros and cons to this type of loan and it is an unfortunate circumstance that honest people who could benefit from this type of loan product are not able to do so as a result of two primary factors: economic conditions and abuses in the practice of borrowing and lending.

That is why First Central Mortgage Funding is here to bring back trust into the process of acquiring a loan.