Small business owners and the self-employed who have difficulty being approved for a traditional home mortgage because they can’t provide pay stubs or tax returns to show their income are getting some relief.
Stated income loans are being offered again by select lender, giving such borrowers a chance to buy properties which they have been locked out of the market for the last 8 years or so. These loans got a bad rap in 2007 because some borrowers produced fake bank statements or at least “fudged” their income to buy houses they couldn’t afford.
Instead of having to provide tax returns or pay stubs, stated income loans require demonstrating an ability to repay through verifiable bank or brokerage statements and enough assets to make six to 12 months of payments.
These loans are more risky and require a higher interest rate for the borrower and a higher yield to the lender. They usually require high credit scores and bigger down payments, usually about 20% or more down payment.
The key to the growth of stated income loans was getting the secondary market to accept them. Stated income had been around since the early 80s but never became mainstream until the investors in the secondary market bought into them during the housing bubble of the early 2000’s.
Many emerging lenders are starting to offer stated income loans with bank statements instead of tax returns to document the ability to afford the loan. They carry a premium interest rate of about 2 percent more than a conventional loan.
For borrowers who can’t document income or who don’t take much salary from their companies, stated income loans can make sense, if they can afford them. In spirit, these loans make sense for people who fit these criteria and are unlikely to ever qualify for a regular mortgage due to unpredictable income.
However, it’s possible for a borrower to get in over their head if they don’t do a realistic cash flowprojection to make sure they can afford the payments. Borrowers should not rely on banks or mortgage companies to tell them what they can afford, but should do their own analyses.
Bottom line, these loans may appeal to some borrowers, but their high costs would lead me to recommend that a borrower wait a few years until they’re income is more stable, and then apply for a traditional loan.
