What Is a Stated Income Loan?
A stated income loan is a unique loan that enables the borrowers to us alternative documentation rather traditional documents such as a pat-stub, W2, etc. Most homebuyers apply for a traditional mortgage by proving their income with paystubs and W-2s from a full-time job, but some consumers need to prove their income with nontraditional documentation. This can be done with a stated income loan.
A stated income loan is a mortgage in which the mortgage lender checks your income with non-standard documentation. There are a variety of workers who can benefit from a stated income loan so they can buy a home, including people with seasonal income, business owners with a new business, self-employed people with little taxable income, and others. Any of these types of workers could be perfectly able to make a monthly mortgage payment but they may lack the traditional income documentation to qualify for a conventional mortgage.
A stated income loan is sometimes referred to a “liar’s loan” and in lending circles a “no-doc loan,” as this type of mortgage carries a higher risk because the borrower’s income is not verified from traditional documentation, like pay-stubs, W-2’s, 1099’s or1040 tax returns. Rather, the borrower is permitted to state their income on the loan application, and in most instances the mortgage underwriter does not require additional documentation to verify this information.
The stated income loans gained popularity two decades ago, as they provided a unique opportunity for borrowers with irregular income sources or those who were self-employed. These state income loans became attractive because borrowers could now obtain a mortgage without the burden of traditional paperwork and income verification documentation.
One of the main advantages of stated income loans is the expedited application process. Since borrowers aren’t required to provide detailed financial documentation, the approval process is quicker, making it attractive to applicants who need streamlined financing. Additionally, these no-doc loans were frequently associated with more flexible lending requirements, making homeownership accessible to individuals who in the past may have had challenges to qualify for a traditional mortgage.
However, the risks associated with stated income loans became glaringly apparent during the housing market crash of 2008. Many borrowers had overstated their income on loan applications, contributing to a wave of foreclosures and financial instability within the mortgage industry. Lenders suffered significant losses as the true financial status of borrowers was often misrepresented.
In response to the housing crisis, regulatory measures were implemented to address the issues associated with stated income loans. The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010, introduced more stringent underwriting standards and required mortgage companies to ensure borrowers had the ability to pay back their mortgages in a timely manner. In recent years, the stated income loans became less available in the aftermath of the financial crisis.
While the popularity of stated income loans has waned, there are still instances where they may be available, especially for self-employed individuals who have difficulty documenting their income through traditional means. However, borrowers should approach these loans with caution, understanding the potential risks involved, such as higher interest rates and the possibility of overextending financially.
Is It Still Possible To Get a Stated Income Loan?
Stated income loans were popular in the early 2000’s and sometimes they were abused when lenders did not carefully check income. Too many people were given these loans, and when many defaulted, it caused major problems in US and international markets. Today, stated income loans are available, but you usually need a 660 credit score and the LTV can usually not be more than 80%, so you need to bring a down payment.
How Do You Qualify For a Stated Income Loan?
The requirements to get a stated income loan today depends on the lender and the type of stated income loan. For example, if you are self-employed or run a business, you may need profit and loss statements for several quarters and recent bank statements. For a bank statement loan, you may need up to two years of bank statements. This also may be called a stated income verified assets loan or SIVA loan. For these loans if you are self-employed, you will need to show you have been in business for at least 24 months.
To get a bank statement loan, you can expect to need to meet these requirements:
- The credit score requirement is around 680. You could get approved with a lower credit score, but you will need to pay a higher rate.
- DTI will be between 36% and 45%. Some lenders may let you have a debt-to-income ratio of up to 55%, but you will have a higher rate.
- Larger down payment. You will usually need more money down, so expect at least 10% or 20%.
- Two years of steady income. Most lenders want to see a self-employed borrower with two years of stable income with two years of bank statements.
Another type of stated income loan that is available today is an asset depletion loan or asset qualifying loan. This kind of loan does not require any employment verification. Borrowers do not even need to have a job. Rather, you can qualify for the loan with your liquid assets that the lender verifies. This is a particularly popular option for retired homebuyers.
How Does An Asset-Based Mortgage Work?
To qualify for an asset-based mortgage, your assets will be added up in terms of cash, retirement, and investment funds. Then, your lender will determine a monthly income based on that total. Usually, the calculation is the party’s total liquid assets divided by 360, which is the number of months in a 30 year loan.
Suppose you have $1 million in liquid assets and $500,000 in retirement savings. This would give you an asset based income of $3,750 per month. Also, these assets need to be from a clear source and be seasoned. So, the lender will want to verify the source of income and see that it has been in the account for a few months. Some lenders may want to see two months, and others may require 12 months.
If you cannot qualify for a conventional mortgage, another option is a personal loan. If you have a credit score of 660 or higher, you may be able to get a personal loan to help you buy a home. These personal loans are usually unsecured and people with good credit scores can get a rate of under 10% in 2023.
When Should You Consider A Stated Income Mortgage?
A stated income home loan could be a good choice if you cannot qualify for or do not want a traditional mortgage, but you have ways to show that you earn enough money to qualify.
For instance, if you own a landscaping company for the last three years and wonder how to get a home loan, you may be able to qualify for a stated income loan with bank statements. However, you can expect the loan to cost you more and the interest rate may be 2% higher than a conventional loan.
Takeaways on Stated Income Loans
While stated income and related loans are not as available as 20 years ago and lending standards have tightened, they are still available. If you cannot qualify for a traditional mortgage because of seasonal income or you are self-employed, one of the stated income loans in this article could be the ticket. So talk to your lender today about your stated income loan options. In most cases, the stated income loan is a mortgage option where borrowers can state their income without providing the usual documentation. While these loans offer an expediated loan process, but typically they come with a higher interest rate and increased closing costs. Since the financial collapse more than a decade ago we have seen increased regulatory scrutiny and that has created a diminished demand the mortgage market because less lenders are willing to consider these risks. So consumers seeking stated income loans should carefully consider the potential costs, benefits and risks.