A stated income mortgage can be a valuable mortgage type for individuals who are self-employed or make their living on seasonal employment. Without traditional income verification a stated income mortgage
does not require the same documentation of income as a traditional home loan.
When you apply for a home loan, they will look at your financial life under a microscope. You will be asked to provide bank statements, tax records, support documents like W-2s, pay stubs, employer verification, and a host of other financial and personal documents. This is done in an effort by the bank to determine the risks of default of a particular borrower. Since the bank is lending such a large sum of money in a home mortgage transaction, it takes special care to lend to qualified buyers who can repay the loan.
For most people, providing documentation of their income is as easy as sending an electronic copy of their paystub. However, there are certain situations where providing a pay stub is nearly impossible. For these borrowers, it is beneficial to apply for a stated income mortgage
. In this type of loan the buyer does not have to provide documentation of his income and is taken at his word as far as how much money he makes.
One situation where a stated income mortgage
is beneficial is in the case of being self-employed. A person who owns his own business might not receive the same income each month as his income is based on when business is doing well. Instead of having to provide two paystubs that give only a partial picture of his income, a stated income mortgage
allow him to include his income for the year, not just a single month.
A similar situation in which a borrower would benefit from a stated income mortgage is in the case of seasonal employment. Take for example a fisherman who makes the majority of his money in the winter. If he goes to buy a home in the summer, he will not have paystubs to show his earnings. So, even if he makes over $100,000 each fishing season he could be denied a home loan. A stated income mortgage
would allow him to use his entire income to qualify for a loan. In addition to seasonal employment, there are careers with other non-standard income schedules. 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.
Individuals who earn money from investments can also benefit from a stated income mortgage. Many investors, particularly real estate investors, have a high debt to income ratio. However, because they often own multiple properties their disposable income can be quite high. A traditional mortgage would look at the numbers and the debt ratio and not consider how much income the properties were generating. A stated income mortgage would allow the investor to qualify, even with a high amount of debt due to properties owned.
Arguments against Stated Income Mortgages
One of the main criticisms of stated income mortgages is that they are an easy target for fraud. Since income is not verified using traditional documentation, it is easy for an applicant to overstate his income. For this reason stated income mortgages have been given the rather unflattering nickname of “liar’s loans.” An investigation into stated income loans by the IRS and various lending companies showed that there has in fact been a significant amount of loans where the income claimed for the loan was higher than what was reported to the IRS. Approximately 60% of stated income loans were over-inflated.
Although it is a bit shocking that 60% of stated income mortgage applicants overstated their income, there are a variety of reasons and factors that could have influenced this. The most obvious is that the borrowers lied about their income to qualify for a higher loan amount. This would be especially problematic because it could lead to an increase in loan default and foreclosure rates. Another reason that there could be discrepancy in the two declared incomes could be that what is reported to the IRS is less than what the individual actually made. For example, many servers do not declare tips (although they should be as not doing so is illegal) so their tax income and actual take home pay may be different.
If you are in a situation where you are having difficulty qualifying for a traditional home loan because of the instability in your income source or difficulty providing proof of income, a stated income mortgage
could be a good option for you. Contact a mortgage broker to learn more about all of your home loan options.
Dennis Dahlberg, Broker/RI/CEO
NMLS 1058389 AZMB 0923961
23335 N 18th
Drive Suite 120