How Stated Income Loans Work
Author: Ryann Cairns
Getting a mortgage can be a complicated matter. But we understand that going in and accept it in light of the large amount of money being loaned and of the length of time we will be paying on the money.
It is understandable if the mortgage company feels they need to have some documentation on your credit history, your employment stability and income details as well as the general reliability of your lifestyle. It is a partnership that will go on for decades so the documentation you usually have to produce is significant. However, there are people who do not draw a regular income from an employer who also are in need of loan assistance.
This would include the self-employed and people living off of royalties, commissions or tips. This is a significant portion of the borrowing public and not one the lending community wishes to deny service for simply due to procedural inflexibilities in how income is documented. To answer this need, the low documentation loan and no documentation loan was devised.
The names are apt. The documentation requirements are tailored to the type of borrower for whom traditional income documentation is just not possible. The trade off of offering loans at a reduced documentation requirements is usually a slightly to somewhat higher rate of interest to cover the additional risk such loans represent. A stated income loan falls into this kind of classification. However, the idea that a stated income loan is strictly low documentation is somewhat deceiving.
It would be more on target to classify stated income loans as alternatively documented loans. The borrower still must provide income substantiation for two years or longer. The difference is that instead of pay stubs or W2 statements traditional borrowers must provide, the stated income applicant provides proof of income through bank statements, P&L statements if they are self employed and similar reliable business documents.
The good news is that if the borrower has strong credit, the stated income loan is the least expensive of the variations on low documentation approaches to lending. Now the borrower still has to produce documentation to help the lender determine their loan qualifications.
Two kinds of debt evaluation are used for this decision. The first is a calculation on the percentage of documented income that will be used to pay for the mortgage. The second is called the debt-to-income ratio which is a calculation of the amount of all debt and its relationship to income.
These calculations help determine if the borrower will be able to take on the mortgage debt payments and still sustain the rest of their obligations and have funds for day-to-day expenses. As a rule, the borrower who is using a stated income loan will pay a somewhat higher rate of interest. The lender uses a number of variables to determine the size of that increased payments. Some of the variables that come into play are.
- Income stability
- Debt-to-income ratio
- Credit score
- Size of the down payment
- The appraised value of the property.
When preparing to apply for a stated income loan, the borrower should be prepared to provide documentation of income, assets, liabilities, home information, and other miscellaneous documents. To substantiate income, in addition to documentation we already discussed, the borrower may need to produce business tax returns if you own your own business or are self employed, other business documents such as an income statement and proof of Social Security, pension, or disability income.
Asset documentation that will assist the lender to determine that your asset holdings make a substantive contribution to your loan eligibility include;
- The last two months of your bank statements
- Your latest investment or trust account statements
- Photocopies of stocks, bonds, or US savings bonds
- The most recent statement of your for 401(k) or IRA accounts
- Details concerning real estate that you own including:
- The address
- The current value
- The loan balance
- The monthly payment
- The rental income if any
- The listing agreement, sales contract and other detail documents concerning the sale of your current home
- The value of autos, boats, art or other things of significant value and any other personal property.
The stated income loan can be a fine alternative to traditional loan documentation for those in the kind of careers not serviced by those loan vehicles. As long as the borrower is informed and prepared for the documentation requirements and higher interest rates, the loan process can go through without a hitch.