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How a Stated Income Loan Works
A stated income mortgage works just like it sounds. The mortgage does not require borrowers to provide personal financial documents such as W-2s and pay stubs when they apply for the loan. Borrowers are required to state the amount and sources of their income on a loan application but are not required to provide certain financial documentation to verify their income as they would with a regular mortgage. Instead, lenders use your credit report and a property appraisal report to determine if you qualify for the mortgage.
In short, stated income mortgages offer very relaxed qualification requirements as compared to standard mortgages. Given the high level of risk and negative consequences of this loan program, they are almost impossible to find these days.
In the build-up to the real estate crisis in 2008 and 2009, stated income loans became very popular. Because lenders did not verify an applicant’s income, many borrowers used stated income mortgages to buy homes that they simply could not afford. Property buyers and lenders assumed that home value would always increase so checking a borrower’s income was less important. As long as property values appreciated, lenders would be protected if the borrower could not repay the loan.
Unfortunately, stated income mortgages led to a significant amount of speculation in the housing market and was one of many factors that created the real estate bubble. In fact, at one point prior to the market collapse, stated income loans accounted for almost 30% of all mortgages. When the bubble burst and property values plummeted, these loans resulted in tremendous losses for both homeowners and lenders.
Following the painful lessons of the real estate and mortgage crisis, both lenders and regulators agreed that offering loans without verifying and documenting an applicant’s income was not a good idea. Today, almost no lenders offer stated income mortgage but they have been replaced by other types of alternative document mortgage programs that offer more flexible qualification requirements for borrowers.
Today, most stated income loans have been replaced bank statement mortgage. With a bank statement loan, instead of requesting tax returns, W-2s or pay stubs, the lender requires that borrowers provide 12-to-24 months of bank and investment account statements to verify their income as well as the source of assets used for the down payment.
As you can see, this type of mortgage program is similar to a stated income mortgage but borrowers are required to provide certain documents to prove that they earn enough money to afford the monthly mortgage payment and that they can eventually repay the loan over time. This is consistent with industry regulations that were adopted after the real estate market collapse. Lenders are required to determine that borrowers can repay the loan and solely not rely on property value appreciation as protection against default or foreclosure.
Borrowers who are self-employed, have limited employment history or who do not want to reveal personal financial information typically used stated income mortgages and those reasons hold true for similar programs today. For example, many self-employed borrowers use bank statement mortgages today because they can not provide W-2s or pay stubs to verify their income or because they experience significant fluctuations in their earnings. Additionally, this type of mortgage program is also good for applicants who cannot or who do not want to provide their tax returns.
Stated income programs were also used by property speculators or investors because you could provide any information you wanted for your income on the loan application. Today, lenders require much more documentation on projected rents and property cash flow as well as a much larger down payment for property investors to qualify for a mortgage.
Alternative mortgage programs are provided by traditional lenders such as banks, mortgage banks, credit unions and mortgage brokers as well as hard money lenders. Not all lenders offer alternative mortgage programs so you may need to reach out to several lenders to find the program you are looking for. Contact multiple lenders in the table below to understand the programs they offer and to request loan proposals. Because loan terms for stated income loans can vary significantly it is especially important to shop lenders to find the mortgage and program that best meet your needs.
Because borrowers provide different personal and financial documents than they would for a standard mortgage, qualification requirements for a stated income loan or similar program can be more demanding. These programs typically require a loan-to-value (LTV) ratio of 90% or less, which means that the borrower is required to make a down payment of at least 10%. This is higher than the down payment required for many conventional and government-backed mortgage programs.
Additionally, these mortgages typically require that borrowers have a higher credit score, in the range of 680 or above. Lenders also typically require that borrowers keep six-to-twelve months of total monthly housing expense as savings in reserve.
Lenders typically charge a higher mortgage rate and fees for this type of loan. For example, the interest rate for a bank statement loan is usually .500% to 1.000% higher than for a regular mortgage. Interest rates and fees are determined by each lender and vary based on LTV ratio and your credit score. The closing costs and fees are also typically higher than for a traditional mortgage and vary based on lender requirements and qualification guidelines.
Many hard money lenders, also known as private money lenders, offer alternative or reduced document mortgage programs to credit challenged borrowers. The interest rate for a hard money loan is typically 4.000% to 7.000% higher than conforming mortgage rates offered by traditional lenders and the fees are also higher. Hard money stated income lenders typically require an LTV ratio of 70% or less, which means that the borrower is required to make a down payment of at least 30%.
If you do pursue a mortgage from a hard money lender be aware of excessive mortgage rates and fees and be sure the compare proposals from multiple lenders to make sure you find the best terms available. Some mortgage brokers work with both traditional lenders and hard money sources and can help you find the lender that is right for your situation.
In some cases borrowers obtain a hard money mortgage for a short period of time and then refinance the loan through a traditional lender such as a bank, mortgage broker or credit union when they can qualify for a standard loan program with a lower mortgage rate and fees.
Use the FREEandCLEAR Lender Directory to search for twenty-five mortgage programs by lender type including private money lenders that offer alternative loan programs.