Looking for a stated income loan to finance a home purchase? Although they still exist, they’re harder to find in the post-recession market. And for those who do find them, there may be a better alternative.
What are Stated Income Loans?
For hopeful home buyers who may have difficulty qualifying for a traditional mortgage, stated income loans were once a hot commodity. With stated income loans, mortgage lenders did not use traditional methods to verify the borrower’s income. Rather than checking out the borrower’s tax returns, W-2s or other financial documents, the lender simply asked the borrower to state their income and the lender essentially took them at their word.
Unfortunately, the sub-prime lending market used these particularly risky loan products to put borrowers in mortgage debt that they were ill-equipped to repay. Once the housing market took a turn for the worse in 2007, many of these stated income loans went into default. Since then, stated income loans have become harder and harder to find, and the ones that do still exist are now being governed by different rules.
Today, stated income loans still allow borrowers to apply with their stated income, lenders are now required to perform some measure of verification. The rules are not as strict as they are for traditional loans; however, The Dodd-Frank Wall Street Reform and Consumer Protection Act states, “A creditor making a residential mortgage loan shall verify amounts of income or assets that such creditor relies on to determine repayment ability…” Today’s stated income lenders may choose to conduct their own version of verification, rather than adhere to the traditional methods. In other words, the lenders must make some attempt at verifying that the borrower’s income claim is accurate.
Stated Income Loans – Are They Worth It?
Stated income loans are appealing to certain types of mortgage borrowers, namely those who are self-employed, investors, entrepreneurs, or anyone who may have trouble documenting consistent income throughout the year. Other perks include a typically quick and easy application process and the ability to have more control over deciding whether or not you can afford the payments.
The downsides to choosing a stated income loan include higher interest rates and a stronger likelihood of default. While you may have faith in your ability to repay the loan, sometimes life throws a curveball. If you overstated your income on the loan application and suddenly find yourself in a troubling financial situation, you run the risk of defaulting on your loan and eventually heading toward foreclosure. Put simply, stated income loans carry very high risk–both for the lender and the borrower.
Alternative to Stated Income Loans
While there are some lenders that still offer stated income loans (mostly smaller local banks), more and more borrowers are finding a better alternative with bank statement loans. They are similar to stated income loans in that they do not require the high level of scrutiny of traditional mortgage underwriting and they are popular among self-employed borrowers, contract workers, freelancers, investors and so forth. Where they differ is in the level of risk and affordability.
With a bank statement loan, the lender does not require W-2s or tax returns to verify an applicant’s income. Instead, they require the borrower to provide copies of deposit bank statements. If the bank statements reflect an amount that lines up with their underwriting guidelines, the borrower could get approved (as long as all other requirements are met, which may include meeting a minimum credit score, down payment or both.)
With bank statement loans, the lender has documentation that provides a fairly reliable picture of the borrower’s finances. Therefore, the interest rates you’ll find on bank statement loans may be well below those for stated income loans.
Where to Learn More
There are likely more lenders in today’s marketplace that are willing to offer bank statement loans than stated income loans, and Luxury Mortgage is one example. At Luxury Mortgage, we offer a Bank Statement Qualifier Loan to qualified borrowers at competitive rates and excellent customer service.
We're dedicated to helping borrowers find the right home loan program for their situation. Contact us today for a free quote and consultation.
Call us today: (888) 379-0303