Traditional income verification is an important step in many mortgages. However, for some stated income mortgage
is a way for borrowers with non-traditional income sources to qualify for a home loan.
Traditional income verification is an important step in many mortgages. However, for some borrowers this can be an almost impossible process that can lead to qualifying for a significantly smaller home loan than they can afford, or even being denied a loan altogether. A stated income mortgage is a way for borrowers with non-traditional income sources to qualify for a home loan.
When you apply for a home l
oan, the bank looks into every aspect of your finances. They run your credit report, look at account statements for all assets, verify your employment, and verify your income. This involves looking at tax returns and all supporting documents for two years. You will be asked to provide you W-2s, W-9s, student loan interest sheets, receipts, and any other documents that verify your income. You will also have to provide your most recent two pay stubs. The bank then puts this information together to get a complete picture of your finances which it uses to make a determination about the amount of mortgage credit you will be allowed to borrow.
For most borrowers, the income verification process is a pain, but doable. They can provide all the information the bank needs and qualify for a mortgage. However, for some borrowers, income verification can be almost impossible. In these cases, a stated income mortgage
can be a useful tool in qualifying for a home loan. A stated income mortgage
is a specific type of mortgage originally designed for individuals who are self-employed or make their income seasonally. In order to qualify for a loan, the borrower states his income to the bank and is taken at his word. The bank does not require income verification, W-2s, or paystubs.
Stated income mortgages have inherited a bit of bad reputation, earning the nick name “liar’s loans.” Opponents point out how easy it is to commit fraud by overstating income. There are numbers to suggest that about 60% of people who received a stated income mortgage made less money than was stated. This was proven using tax returns. However, there are a number of reasons that a borrower’s taxable income was less than he declared for a mortgage. He may have had a slow year, or may have made money under the table like in the case of a side job or server.
When is a Stated Income Mortgage a Good Option?
Despite their less than flattering nickname, stated income mortgages can be useful certain borrowers to qualify for home loans. Specifically, individuals who are self-employed, independent contractors, freelancers, new to a job or career field, or have a side job or business can benefit from a stated income mortgage
One case in which a stated income mortgage
is a smart choice is self-employment. This is actually the income situation that the mortgage type was designed for. For many small business owners, independent contractors, consultants, and other self-employed business people, it can be difficult to furnish proof of income to the bank’s satisfaction. Income sources may be considered unstable or there may simply not be a traditional W-2 or pay stub that can be provided. A stated income mortgage allows the business owner to state his/her income and qualify for a mortgage based on that statement.
Another situation that can benefit from a stated income mortgage is a career that does not have consistent income schedule. A Realtor would be a good example of such a career. A Realtor may make $8,000.00 in commission one month, nothing the next, $16,000.00 the third and then nothing for 3 months. Although the agent is making enough money to purchase a home, the instability of her income might disqualify her from obtaining a traditional loan. By using a stated income mortgage
she could account for all of her income, even if she isn’t earning any during the current month.
A third situation that would benefit from a stated income mortgage
would be in the case of a freelancer or consultant. People who are employed in these fields generally tend to work for more than one company. Their work is also often seasonal or may vary from month to month. During the mortgage qualification process, banks look at 2 months of pay stubs. If it is a slow month, the amount of pay may not reflect the actual amount that borrower earned and therefore he/she may not qualify for a high enough amount, if at all. In addition, banks require that a borrower works for a company for a year or more before that income source is considered valid. A freelancer or consultant often works for many different companies but only one or two on a permanent basis. Therefore the actual income of the borrower could be $200,000 but only $50,000 is counted as income by the bank. A stated income mortgage
allows the borrower to use their actual income amount to qualify for a mortgage.
A final case in which a stated income mortgage
is a good option (although this is certainly not an extensive list), is for someone who makes his or her living from investments. Take a real estate investor who owns multiple properties all with loans. Even if this investor makes $100,000 a year in disposable income and has the mortgage on each property covered by rent, his/her debt to income ratio might be too high on paper to be given an additional home loan. A stated income mortgage
accounts for the actual disposable income this individual has to spend each month, rather than just what the financial situation looks like on paper.
If you are in an employment situation where a
stated income mortgage makes sense, find a broker to get started.
Most traditional banks do not offer stated income mortgages
as they are considered higher risk loans. Brokerage firms and smaller banks often have programs that will work with borrowers who need a stated income mortgage.
Dennis Dahlberg, Broker/RI/CEO
NMLS 1058389 AZMB 0923961
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