Stated income loans are making a comeback — sort of.
Extremely popular in the early 2000s, stated income loans were one of the factors of the housing market collapse. Why? Lenders were approving borrowers based on the income stated on their loan application, but didn’t require income documentation to verify if it was accurate. The result: many borrowers defaulted on loans.
With the passing of the Frank-Dodd Act of 2010, stated income loans for owner-occupied properties are now illegal. Lenders must fully document a borrower’s ability to repay the loan either with income or assets. (Stated income loans still exist for real estate investors, however, because they aren’t purchasing an owner-occupied home.)
That leaves some borrowers at a disadvantage, especially self-employed borrowers. But, the good news is that there is a type of loan called a bank statement loan (also referred to as alternative income verification loans) that meet these borrowers needs.
Stated income loans for self-employed borrowers
Self-employed borrowers may find it difficult to qualify for traditional mortgages due to their variable income and tougher documentation requirements from lenders. With alternative documentation loans — aka bank statement loans — lenders use different methods to determine qualification, but still meet the new ability-to-pay standards as laid out in the Frank-Dodd act.
For bank statement loans, lenders use bank statements (typically 2 years) to confirm a borrower’s income rather than tax returns and recent pay stubs like traditional borrowers. Each lender has its own underwriting requirements to determine net income (income minus business expenses and taxes), so if you don’t qualify with one lender, then there may be another that you will.
Bank statement loans are offered through non-QM lenders (also known as non-qualifying mortgage lenders), which sounds scary but simply means the loan can’t be sold to Freddie Mac or Fannie Mae, which most loans are. Not all lenders offer non-QM loans, so you’ll need to shop around — this list from the Scotsman Guide is a good place to start.
Read more: How to Comparison Shop for a Mortgage
Qualifying for a bank statement loan
In addition to determining your net income, lenders also look at the following things when determining loan qualification:
- Two-year timeframe. Most lenders require self-employed borrowers have at least two years of experience with consistent income.
- Debt-to-income-ratio. This ratio determines the maximum loan amount. Some lenders may go as high as 55% (traditional mortgages are usually between 36% to 45%), though the actual ratio is lender specific.
- Down payment. These loans tend to require larger down payments than traditional mortgages. A borrower with great credit may still be required to put 10% down (conventional mortgages allow for 3% down), but some lenders may require more.
- Credit score. Expect a higher credit score requirement with bank statement loans (680+). While you may qualify with a lower score, you’ll definitely be charged a higher interest rate.
Also, a note about interest rates. Because these loans are considered riskier, expect interest rates to be 1% or more higher than for traditional mortgages. Though, as more lenders start offering non-QM loans, rates may become more competitive.
Stated income loans for real estate investors
While stated income loans don’t exist for owner-occupied properties, they’re still available for borrowers looking to purchase an investment property. This is a big help for borrowers like real estate investors, house flippers, wanna-be landlords, and self-employed borrowers looking to purchase a non-occupant property and qualify for a loan without fully documenting their income or providing tax returns.
Brian O’Shaughnessy, CEO of Athas Capital Group, says that many of his clients use these loans to buy another rental property to better their cash flow, or they’re flipping a property and need a loan to finance the remodeling stage. In addition, some borrowers use stated income loans temporarily because they expect a large cash advance at the end of the year, but don’t want to pass up an investment property — 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 step up from hard money loans,” O’Shaughnessy says. (Hard money loans are specialized collateral-backed loans, which have high interest rates and short terms usually around 12 months.)
Qualifying for a stated income loan
Lenders who offer stated income mortgages aren’t qualifying borrowers nonchalantly. Borrowers need to have good credit scores, plenty of cash reserves, and a large down payment. Many stated income loans are based on the equity position of the property, which means that the more the borrower puts down, the easier it’ll be to get the loan.
“With us, a buyer has to put down at least 30% down compared to the regular 20% with a conventional loan. Many of our clients end up putting down 35%-50%,” O’Shaughnessy says. “The loan also has a maximum 70% loan-to-value ratio.”
The borrower’s employment is verified, but the application just has to state monthly gross income. Bank statements and asset documentation are required to show that the borrower does indeed have the money. Also, similar to bank statement loans, interest rates will most likely be higher than a traditional mortgage loan depending on the lender.