Stated Income Loan
What is a stated income loan?
In the past, stated income mortgages were home loans that did not require income verification or documentation. Lenders just needed a borrower’s stated income — hence the name “stated income” loans.
Unfortunately, this is the risky loan type that contributed to the 2008 housing market crash, and banks stopped issuing stated income loans as a result. This prevented banks from selling undocumented mortgages in the secondary marketplace.
The 2010 Dodd-Frank Act transformed this loan product for the better. Today, borrowers cannot take out a home loan without proving their ability to repay the loan. Lenders must fully document this proof, and borrowers are required to submit the proper documentation.
However, stated income loans do not require income documentation or tax returns for self-employed borrowers. It is now illegal for any consumer to get this loan type for an owner-occupant property.
For your average employed borrower, documentation includes tax returns, W-2 forms, and recent pay stubs to qualify for a typical conventional mortgage. Self-employed borrowers have higher requirements because their income is subject to change.
Lenders typically require very little documentation and no income verification for stated income loans. Instead, they prefer borrowers to have a good credit score, a large number of reserves, and a significant down payment. The better the financial picture you can paint for lenders, the more likely you will get approved and get favorable interest rates.
How can you qualify?
To compensate the risk taken by your mortgage lender, stated income loans usually require the following:
Large amount in savings
High credit score requirement (700+)
Bank statements are needed
High level of income
Do stated income loans make sense for you?
Many borrowers use these loans to buy another rental property. In other cases, a borrower may be flipping a property to sell but need a loan to renovate their flip. Others use this loan temporarily because they have a big cash advance coming but can’t pass up on a particular investment property.
Some investors do not want to spend all their cash to buy a property. Instead, they use stated income loans to keep a portion of their capital for future investments.
Are stated income loans available?
Income loans, also known as No-doc mortgages, played a major role in the most recent housing downturn. At the time, borrowers could obtain a mortgage without providing income documentation. It wasn't long after that lenders discontinued these loans altogether.
Self-employed mortgage alternatives
There are alternative loans that share similar qualities to stated income loans. Other names of this type of financing are “alternative income verification loans,” “alternative documentation mortgage loans,” or “bank statement loan programs.”
These terms refer to the same loan product so let's call them bank statement loans. This loan program is most helpful for borrowers who receive their income from many sources, such as self-employed ones.
Bank statement loan program
This loan type is a flexible and affordable option for self-employed borrowers. With a bank statement loan, borrowers can purchase or refinance a home without providing tax returns and too much documentation. They are also easier to qualify for than the standard stated income loan. Best of all, you can finance an owner-occupied home without having to worry about the legalities of Dodd-Frank.
How to qualify?
The following are requirements for the bank statement loan program.
Must be in business for 2+ years
Low credit score requirement (600+)
Provide documentation such as:
Your business license
12 months of personal and 24 months of business bank statements
Expense ratio
Signed CPA letter stating you are still in business