What Is a Stated Income Mortgage?
Home loans come in a variety of shapes and sizes. Different financial and employment situations create the need for multiple ways to secure loans, make down payments, and so on. Where traditional mortgages often rely on tax documents to determine income, less common types of mortgages use other methods. One such approach (or umbrella of approaches) is known as a stated income mortgage.
Put briefly, a stated income loan allows an applicant to simply state their monthly income, instead of providing documentation - like tax returns or pay stubs - to verify that income. Now, in years past, these loans were less regulated. In the wake of the financial crisis a decade ago, some changes have been made to these types of loans - but the basic principles remain. The point is to be able to offer home loans to people with complicated tax profiles, such as entrepreneurs, career freelancers, and other self-employed workers.
These situations can make it difficult to document exact income because of write-offs, inconsistent profits, no traditional "paycheck," and other irregular forms of income. Stated income loans can also be beneficial for those investing in property but have assets tied up in other areas, or those expecting a cash windfall later in the year, but don't want to pass up an opportunity.
All of these components of a stated income loan are for the convenience and benefit of the borrower, but they do result in added risk for the lender. That risk often means higher rates, steeper credit score requirements, and larger down payments. So, even if a borrower is allowed to state their income without documentation, they still establish their ability to meet the terms of the loan through strong credit history and a significant amount of cash up front. Where traditional mortgages typically require a 20% down payment, stated income mortgages may require 30%.
Even with stated income, there are also other ways a lender will want to verify your income. These methods - which will be discussed in more detail in future posts - are what make "stated income loan" a relatively broad term. Of course, different lenders will have different principles, their own specific requirements, and their own preferred methods of verifying income. Still other lenders will do very little verification for a stated income loan - but that will likely mean even stricter credit score requirements and even higher down payments. These types of loans are viable options for people with irregular income, or may not otherwise qualify for a traditional mortgage. Remember, however, that you will have to pay for the price of convenience. One way or another, the lender will protect themselves against risk - whether it's through higher rates, fees, strict requirements, higher down payments, shorter terms, and so on. If you're self-employed, stated income loans may be perfect for you - especially if you have great credit and strong savings. An irregular income doesn't have to prevent you from qualifying for a home loan. You have a variety of options to help you finance the home of your dreams - or your next investment!