Stated Income Loans Available Self-Employed Borrowers 2023
A stated income loan is a type of mortgage for borrowers who are unable to provide tax returns or pay stubs to prove their income. Since the lender can’t verify your stated income, a higher credit score and down payment may be required to compensate for the risk being taken by your lender.
A stated income loan is a mortgage where the lender does not verify the borrower’s income by looking at their pay stubs, W-2 (employee income) forms, income tax returns, or other records. Instead, borrowers are simply asked to state their income, and taken at their word. Background: What are stated income loans?
A stated income mortgage is a home loan that requires no income verification or documentation. What is a stated income loan? A stated income loan is a mortgage where borrowers provide reduced documentation and qualify by using bank deposits as proof of …
Stated Income Loans Available Self-Employed Borrowers 2023
SISA. Stated-income, stated-asset loans are made without verification of a borrower’s income or assets. Stated-income loans are no longer …
A stated income loan is a mortgage where the lender does not verify the borrower’s income by looking at their pay stubs, W-2 forms, income tax returns, or other records. Instead, borrowers are simply asked to state their income, and taken at their word. These loans are sometimes called liar loans or liar’s loans.
Extremely popular in the early 2000s, stated income loans were one of the factors of the housing market collapse. Why? Lenders were approving borrowers based on the income stated on their loan application but didn’t require income documentation to verify if it was accurate. The result: many borrowers defaulted on loans.
With the passing of the Frank-Dodd Act of 2010, stated income loans for owner-occupied properties are now illegal. Lenders must fully document a borrower’s ability to repay the loan either with income or assets. (Stated income loans still exist for real estate investors, however, because they aren’t purchasing an owner-occupied home.)
That leaves some borrowers at a disadvantage, especially self-employed borrowers. But, the good news is that there is a type of loan called a bank statement loan (also referred to as alternative income verification loans) that meet these borrowers needs.
Stated income loans for self-employed borrowers
Self-employed borrowers may find it difficult to qualify for traditional mortgages due to their variable income and tougher documentation requirements from lenders. With alternative documentation loans — sometimes called bank statement loans — lenders use different methods to determine qualification but still meet the new ability-to-pay standards as laid out in the Frank-Dodd act.
For bank statement loans, lenders use bank statements (typically 2 years) to confirm a borrower’s income rather than tax returns and recent pay stubs like traditional borrowers. Each lender has its own underwriting requirements to determine net income (income minus business expenses and taxes), so if you don’t qualify with one lender, then there may be another that you will.
Bank statement loans are offered through non-QM lenders (also known as non-qualifying mortgage lenders), which sounds scary but simply means the loan can’t be sold to Freddie Mac or Fannie Mae, which most loans are. Not all lenders offer non-QM loans, so you’ll need to shop around — this list from the Scotsman Guide is a good place to start.
Qualifying for a bank statement loan
In addition to determining your net income, lenders also look at the following things when determining loan qualification:
- Two-year timeframe. Most lenders require self-employed borrowers have at least two years of experience with consistent income.
- Debt-to-income-ratio. This ratio determines the maximum loan amount. Some lenders may go as high as 55% (traditional mortgages are usually between 36% to 45%), though the actual ratio is lender specific.
- Down payment. These loans tend to require larger down payments than traditional mortgages. A borrower with great credit may still be required to put 10% down (conventional mortgages allow for 3% down), but some lenders may require more.
- Credit score. Expect a higher credit score requirement with bank statement loans (680+). While you may qualify with a lower score, you’ll definitely be charged a higher interest rate.
Also, a note about interest rates. Because these loans are considered riskier, expect interest rates to be 1% or more higher than for traditional mortgages. Though, as more lenders start offering non-QM loans, rates may become more competitive.
Stated income loans for real estate investors
While stated income loans don’t exist for owner-occupied properties, they’re still available for borrowers looking to purchase an investment property. This is a big help for borrowers like real estate investors, house flippers, wanna-be landlords, and self-employed borrowers looking to purchase a non-occupant property and qualify for a loan without fully documenting their income or providing tax returns.
Brian O’Shaughnessy, CEO of Athas Capital Group, says that many of his clients use these loans to buy another rental property to better their cash flow, or they’re flipping a property and need a loan to finance the remodeling stage. In addition, some borrowers use stated income loans temporarily because they expect a large cash advance at the end of the year, but don’t want to pass up an investment property — they use these loans to keep a portion of their own capital to use for other investments.
“Stated income loans are growing. It’s a step up from hard money loans,” O’Shaughnessy says. (Hard money loans are specialized collateral-backed loans, which have high-interest rates and short terms usually around 12 months.)
Qualifying for a stated income loan
Lenders who offer stated income mortgages aren’t qualifying borrowers nonchalantly. Borrowers need to have good credit scores, plenty of cash reserves, and a large down payment. Many stated income loans are based on the equity position of the property, which means that the more the borrower puts down, the easier it’ll be to get the loan.
“With us, a buyer has to put down at least 30% down compared to the regular 20% with a conventional loan. Many of our clients end up putting down 35%-50%,” O’Shaughnessy says. “The loan also has a maximum 70% loan-to-value ratio.”
The borrower’s employment is verified, but the application just has to state monthly gross income. Bank statements and asset documentation are required to show that the borrower does indeed have the money. Also, similar to bank statement loans, interest rates will most likely be higher than a traditional mortgage loan depending on the lender.
Stated Income Loans, plus Alternative Documentation Loans for 2023
Alternative Documentation DefinitionAlternative documentation is a process designed to expedite loan approval where the borrower can submit certain documents to the lender for review.
No Income / No Asset Mortgage (NINA) Definition
No Income / No Asset (NINA) mortgages are a type of loan where the borrower does not have to prove their income or net assets to the lender.
No Documentation (No Doc) Mortgage
A no documentation mortgage is granted without supporting evidence of borrower income but on a declaration confirming they can make payments.
Liar Loan Definition
A liar loan is a type of approval for a mortgage that requires little or no documentation to prove the income of the borrower.
Low/No Documentation Loan
A low/no documentation loan is a mortgage product that has lower documentation requirements than a traditional loan.
Best Subprime is a classification of borrowers with tarnished or limited credit history. Subprime loans carry higher credit risk, so higher interest rates.
Stated Income / Stated Asset Mortgage (SISA)
What Is Stated Income / Stated Asset Mortgage (SISA)?
A stated income-stated asset mortgage (SISA) loan application allows the borrower to declare their income without verification by the lender. These loans were designed to ease the application process for buyers who have incomes that are difficult to document, such as the self-employed and those who depend on tips as a significant portion of their income.
SISA loans are one loan in a category of products called Alt-A. SISA loans are also known as no income-no asset (NINA) loans and liar loans. Loosened lending requirements allowed the SISA loan to play an influential role in the 2008 subprime financial crisis.
Understanding Stated Income / Stated Asset Mortgage (SISA)
The stated income-stated asset mortgage (SISA) originated as a tool for potential homeowners in specific financial situations to apply for a mortgage. Self-employed individuals, for example, often maximize tax deductions to reduce their adjusted gross income (AGI) and thus have access to cash flows that may not appear on individual tax returns.
Usually, lower AGIs would make these borrowers less attractive to lenders. The SISA loan is also designed to help buyers whose income may come in the form of tips, or other unconventional cash payments.
Initially, these loans had stringent conditions to offset the risk presented to the lender by lowered income disclosure requirements. SISA borrowers faced a combination of higher interest rates, more substantial down payments, and higher credit score requirements than traditional loans required.
The borrower might need to have considerable cash reserves available in their bank accounts. Also, the loan might limit the new monthly mortgage payment to a particular percentage over their current housing payment.
Loosening of Mortgage Requirements in the 2000s
Mortgage market conditions encouraged lenders to loosen mortgage requirements in the early 2000s. Stated income-stated asset mortgage (SISA) and other Alt-A loans became popular.
These loans served both the needs of lenders and borrowers. Lenders wanted to clear as many loans as possible before re-selling those loans on the secondary mortgage market. Borrowers were happy to avoid documentation requirements, especially as SISA loan terms and interest rates approached those of traditional loans.
The alignment of interests led to unqualified borrowers receiving, and defaulting on, loans that were beyond their spending power. Foreclosure on these liar loans accelerated in 2007, as the financial crisis took hold.
In the wake of the 2008 meltdown, legislators and regulators scrutinized SISA loans, and the marketplace for these loans tightened once again. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act severely restricted SISA loans, making them unavailable for owner-occupied properties. Now, these products are the venue for borrowers seeking to purchase investment properties.
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