The Dodd-Frank Act has made it virtually impossible to obtain a mortgage loan without qualifying your income via standard means – such as W-2s, income tax returns, and pay stubs. But, there are ways to get around it and still obtain a mortgage for your primary residence. It’s true that the new regulations definitely make it harder to obtain a loan from one of the four government entities: Fannie Mae, Freddie Mac, FHA, or VA but that does not mean that there are not other lenders out there willing to back the loans themselves, providing a work around the previous stated income loan.
What was the Stated Income Loan?
Prior to 2007, the stated income loan was just as the name suggests – you stated your income on your mortgage application. That amount was taken at face value, meaning that the lender did not verify if you actually made that money. In exchange for the higher level of risk you were providing the lender, you paid a higher interest rate. Some considered these loans, subprime loans, although there were a few programs offered and backed by Fannie Mae and Freddie Mac. The implosion of the mortgage industry was mostly blamed on these “liars’ loans” and have since been taken off of the market.
Who’s Offering Stated Income Loans Again?
Fast forward to 2015, and many lenders are offering the stated income loans again, just with different names and different terms. The problem that the lenders are running into is that they have to abide by certain government guidelines when providing loans for a primary residence; it is just the way the government regulations have gone. The elected officials are all about protecting consumers and their housing. These rules do not pertain, however, to investment loans, which means that investors can get almost any type of loan with very little regulations governing what they do. The problem lies in the fact that most people that are looking for large loans are those that are trying to secure housing for themselves, not as an investment. The lenders willing to offer these loans are private investors. These investors are the ones that are tired of the low yields being offered on other investments lately and are turning to mortgages in the hopes of making a greater return.
In general, you will not find stated income loans or loans with any synonymous names at your bigger banks. These banks are sticking with loans that are backed by the government, namely Fannie Mae, Freddie Mac, USDA, FHA, or VA. You will find them at smaller banks/lenders that have private investors, however. Investment firms are becoming more and more interested in these types of loans, especially if they meet the rest of the Qualified Mortgage guidelines, as they are deemed safe, they just might not meet the income verification requirements that a standard W-2 employee would meet.
Who Needs Stated Income Loans?
Stated income loans are basically for those borrowers that are not your straightforward W-2 employees. Today, that is harder to come by than any other type of wage earner. People had to become more creative with their income as layoffs and company closings became rampant in recent years. This has led to a variety of other income earning methods including self-employment; commission based income; and even real estate investment income. These borrowers, while making a decent living for themselves, cannot provide the standard income documentation. In fact, their tax returns might show a completely different story than what they claim to make on their mortgage application because of the deductions and/or credits that the IRS allows. As these borrowers try to minimize their tax liability, they are hurting themselves in the long run as it becomes very difficult to qualify for a loan with the diminished income that they claim on their tax returns. These are the prime candidates for the stated income loan, which has taken on many other names in order to stay away from the negative connotations that this loan name has received.
Ways to Verify Income
So how are the private lenders verifying the income brought in by these select borrowers? Many are using bank statements as the method of verification. If there are regular deposits made into the account on a weekly or monthly basis, it is quite evident that the borrower is receiving steady income. Consistent bank deposits can be used as a valid way to verify income and will allow the loan to still meet the Ability to Repay rules that govern today’s lending industry. The use of bank statements does not rely on the borrower “stating” his income – it is still being verified, just in a more unique way than W-2s or tax returns would provide. The key factor is the length of time you can provide the bank statements to cover – if you are only providing a month or two worth of bank statements, the loan will not likely get approved; however if you have a year’s worth of statement showing the same cash flow, the income can likely be used.
The Stated Income Loan Guidelines to Follow
Just because private lenders offer these alternative types of loans does not mean that they do not need to meet the other guidelines, such as Qualified Mortgage or Qualified Residential Mortgage Rules. Every lender that is supplying a primary residence mortgage needs to follow the rules in order to protect themselves. The level of risk the lender is willing to take is up to him, however. The guidelines set forth by the government were put into place in order to prevent borrowers that default on their loan from suing the bank or from the government requiring the lender to buy the loan back if it were to default. It is pretty safe to say that most lenders abide by these rules as closely as they can. This means that they are doing the following:
- Keeping fees to a minimum (no more than 3% of the loan amount)
- Not providing excessive or risky terms (30 years max and no interest only or negative amortization)
- Debt ratios that are considered “standard”, typically no more than 43%
- Figuring in all debts related to housing as well as monthly obligations outside of the housing that affect a person’s income
It is not as easy as it used to be to get around the rules regarding stated income verification, but it is possible with a little work. Finding a private lender is more difficult than finding those that offer government backed loans, but they are out there. Just make sure you are dealing with an honest lender that will truly investigate your ability to repay the loan and provide you with a loan with honest terms in the end.