The Risks of Stated Income Mortgages
The upsides of Stated Income loans are relatively clear: they provide options for those who may not otherwise qualify for a traditional mortgage. The most common uses today (as opposed to some of the problematic mortgages of the past) are for people with nontraditional income. Not having to provide thorough documentation makes it easier for people who work for tips, have multiple streams of income, have irregular payment schedules, and so on... But do Stated Income mortgages come with downsides? The short answer is YES.
Now, this doesn't mean that Stated Income loans should be avoided entirely, or that there aren't scenarios where it's the best choice for a home loan. Instead, these downsides need to be taken into careful consideration and weighed against the benefits.
Because these types of loans carry significant risk for the lender, there are a few primary downsides for the borrower. Even if you are responsible, have a great credit score, etc., the lender still needs to protect its own interests. This happens in three significant ways: Closing Costs
The first thing to consider about Stated Income mortgages: elevated closing costs. While every lender is a bit different, it's quite common for these types of loans to require a much larger down payment than the alternatives. Even though you don't have to prove your income, the lender still needs to abide by some rules - namely the Ability to Repay rule. Without verified income, one of the ways a lender can achieve this is through a large down payment. Additionally, it makes sense for a lender to require a significant payment up front just in case you default on your loan. Even if you are unable to repay the loan in full, they've made some of their money back at the very beginning of the process. There may also be higher fees associated with Stated Income mortgages than other types of loans. All of this is done to mitigate risk to the lender. Interest Rates
Similar to increased closing costs, lenders may only offer Stated Income loans at higher interest rates than you see with other types of mortgages. To help the lender ensure they make their money back (or maximize the amount they make in the event of a default), the interest rates are likely to be higher. This is extremely important to calculate as you're exploring options - the upfront benefits of not verifying income could be outweighed by the long-term costs of your loan. A high interest rate could mean the total price of your home is thousands of dollars (or more) higher than the initial figure you agree to.
Again, this doesn't have to be a deal breaker. You will understand your financial situation best, and have an idea of where you will be in the future - but make sure your'e looking at the long-term implications of your loan's interest rate before you agree to the terms.
Depending on the size of your loan, your past history, and a variety of other factors, you may encounter restrictions that make a Stated Income more difficult to obtain. Or, if you do qualify, the restrictions may affect the type of property you can purchase. Some Stated Income mortgages are only available for people buying their second (or third, etc.) property, require a fantastic credit score, allow for stated income but require asset verification, and so on. If you're considering a Stated Income mortgage, you'll want to make sure you meet the requirements posed by many lenders. At the very least, research some of the requirements, figure out where you stand, and then seek out lenders that fit with your unique situation.
All of these factors make Stated Income loans sound more difficult to acquire - and for some people, that may well be the case. Still, these types of loans are an opportunity for those with nontraditional income to purchase a home, and the downsides can be well worth the benefits. Know what you're getting into so there aren't any surprises, and be diligent about finding the lender that's right for you!