Stated income loans don’t require income documentation and can be a big help for borrowers with stacks of tax returns. Here’s who can take advantage of the resurrected mortgage program.
Even after all the lessons learned after the mortgage crash, there still are home loans that do not require the borrower to show their tax returns. It sounds strange since the government admits that these types of loans, called Stated Income Loans, were one of the causes of the collapse.
But it is possible again for borrowers such as self-employed people or independent contractors who have difficulty documenting their income to actually get a stated income loan to buy a non-occupant property for investment purposes.
Now in 2017, these loans are used by borrowers such as small business owners or investors trying to grow their equity and who intend to rent the property. The program helps these investors, house flippers and landlords who have multiple expense write-offs on their tax returns to buy investment properties without fully documenting their income.
Stated Income Loans: Available within Business Lending
“If I wanted to go refinance my house or buy a new house to live in and get a stated income loan, I couldn’t do it,” says Brian O’Shaughnessy, CEO of Athas Capital Group, based in Calabasas, Calif. “It is against the law to get a stated income loan for a consumer loan. The owner-occupied loans are highly regulated by the Consumer Financial Protection Bureau.”
New regulations in the beginning of 2014 said lenders who fail to verify a borrower’s ability to repay a home loan face the risk of the mortgage being challenged in court. But investor mortgages aren’t included in those regulations because they are considered business loans, he said.
And let’s not forget that the Dodd-Frank Act of 2010 – which was written after the mortgage crisis happened. This act made stated income loans basically illegal for lenders to offer them on owner-occupied loans.
The borrowers with these type of loans ended up being the first to default when the market crash happened. A large percentage of all mortgages back before the fiasco were made with stated-income loan applications. They were less paperwork and hassle, and it sped along the process for the borrower and lender.
According to a study of borrowing in the third-quarter of 2006 by Standard & Poors, 69 percent of all “Alt-A” loan applications – those who didn’t show proof of income to justify the loan payments — used “stated income” paperwork. These applications generally required no written verifications for income and no tax returns.
Who Can Qualify for a Stated Income Mortgage?
But lenders who are giving out stated income loans to investors these days aren’t just handing out their money nonchalantly. The borrowers need to have very good credit scores, lots of cash reserves and amazingly high down payments.
“With us, a buyer has to put down at least 30 percent down instead of the regular 20 percent on a conventional loan. Many of our clients end up putting down 35-50 percent,” O’Shaughnessy says. “The loan also has maximum 70 loan-to-value ratio.”
The borrower’s employment is verified, but you just to have to state your monthly gross income on the application. Bank statements and asset documentation are required to show that you do have the money.
The detriments of a stated income loan could be that the interest rates most likely will be higher than a traditional mortgage loan, depending on the lender. The down payments can also be quite high.
Many of the stated income loans are based on the equity position in a property. That means that the more the borrower puts down into the investment property, the easier it will be to get the loan. This business model holds true for many mortgages because lenders see that the borrower is willing to put up a large amount of money. That hopefully rolls into the less likelihood that the borrower will default down the line because they already have so much invested.
Who Currently Uses Stated Income Loans?
O’Shaughnessy says that many of his clients use these loans to buy another rental property to better their cash flow, or they are flipping a property to sell but need a loan to get through the remodeling stages.
Some people use the loans temporarily because they have a big cash advance coming at the end of a year but can’t pass up on a certain investment property. Some investors don’t want to use up all their cash to purchase a property, so they use these loans to keep a portion of their own capital to use for other investments.
“Stated income loans are growing. It’s a jump from hard money loans,” O’Shaughnessy says.
Hard money loans are specialized collateral-backed loans. They tend to have high interest rates and very short terms of around 12 months.
Stated income loans are a step up from hard money loans and give the investor much more flexibility when building their real estate portfolio.