What Is A Stated Income Loan?
Updated: December 15th, 2021
Qualifying for a loan can feel like tackling hurdle after hurdle. After all, your lender needs you to prove you’re capable of repaying what you borrow. But wouldn’t it be nice if they could just take your word for it?
Well, at one point in time, that was possible. Stated income loans allowed borrowers to apply for loans without income documentation to back up their claims. While that sounds nice in theory, it led to significant consequences. Here’s an overview of stated income home loans, their target borrower, and how they still hang around today.
Understanding Stated Income Home Loans
A stated income mortgage is a type of home loan unique for its lax regulation. It did not require lenders to verify or ask for income documentation. Instead, banks and other lending institutions only needed to ask for a borrower’s “stated income.”
As a result, you may hear stated income loans referred to as “liar loans.” This is a more general name describing mortgages that require little to no documentation. The loan provider merely underwrites the loan according to the information the borrower themselves supplies.
They, understandably, sound risky now. But originally, these loans helped self-employed borrowers with variable income who struggled to deliver the documents needed for a conventional loan. However, to compensate, liar loans heavily rely on credit scores.
Are Stated Income Mortgages Still Available?
Stated income loans were very popular during the early 2000s. But due to lax loan approval methods, contributed to the collapse of the housing market in 2008. Borrowers would apply for the loans and write out their income on the documentation.
However, lenders did not require any documentation to verify that information. Eventually, this resulted in mortgage defaults and foreclosures since the borrowers couldn’t keep up with repayment.
Now, as a result of the 2010 Dodd-Frank Wall Street Reform and the Consumer Protection Act, borrowers of owner-occupied properties can no longer take out stated income loans. But they haven’t completely disappeared. They are still available to investors looking to buy property.
Additionally, the previously mentioned Acts paved the way to reform stated income loans. So, even if you need to fund an owner-occupied property, you can find a similar lending opportunity through bank statement loans.
Mortgage Alternatives To Stated Income Loans
There are still mortgage options available for self-employed borrowers, even if the era of the stated income loan is over. In this case, you can consider the alternative of the bank statement loan.
As the name suggests, bank statement loans allow borrowers to use business or personal bank statements in the place of tax returns to calculate their income. Lenders use this information to estimate the borrower’s ability to repay the loan. They also look for other factors in qualifying borrowers, namely strong credit scores, a large down payment, and sufficient cash reserves.
Additionally, nonconforming lenders offer bank statement loans, meaning they can’t be sold to Fannie Mae or Freddie Mac.
Mortgage Qualifications For Self-Employed Borrowers
The loan application process is difficult enough on its own. Self-employment throws an extra layer of confusion into the mix since it’s hard to document your income in the same way as someone employed at a company with a regular paycheck.
But that doesn’t mean borrowing is any different. There are no unique requirements designed to make it difficult for self-employed individuals to apply for loans. The standards you face are the same for other applicants.
Because of this, lenders consider standard criteria when a self-employed individual needs a loan. That includes factors like your credit score, credit history, liquid savings, assets, and current debts.
In particular, your debt-to-income ratio is important since it allows lenders to better understand your income level. For the same reason, they often ask that self-employed individuals have at least 2 years of steady taxable income to ensure you can keep up with repayment. To prove this, you may need to produce recent tax returns, a business license, a balance sheet, and more.
The Bottom Line
Although stated income loans are no longer available to self-employed home buyers, there are still financing opportunities out there. You can explore your mortgage options as soon as today, too.
Consult with a Western Pacific Home Loans Expert to start collecting the information you need.
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