In the start of the 21st century there were a number of loan packages that were developed to meet the needs of certain market segments. One of the more popular loans was the stated income loan. Also known as no doc loans, stated loans were designed for people who were self employed and had difficulty reporting their income. For the right borrower, these loans are perfect for helping them get a loan approved that they would not have otherwise qualified for.
Poor lending practices combined with negative media coverage has given stated income loans a bad rap over the past few years. One of the reasons for the housing crash in the U.S. was lenders unscrupulously approving loans to sub-prime borrowers. The problem with stated income home loans arose when mortgage brokers began signing clients who should not have qualified for these loans.
Some brokers would use the stated income technique as a means to artificially raise the income of their clients to ensure the loan was approved. This would even occur with people who have regular jobs with proper W-2 documentation for standard loans. This is one of the reasons why this particular loan was coined the “liar loan”.
The problem with these loans was that the typical borrower would inflate their income by up to 15% to 20%. Although a lot of the mortgage brokers knew they were inflating the numbers, the responsibility of the loan was then passed on to the banks, who then sold these loans under separate packages to other institutions. The lack of responsibility was one of the key reasons for these loans to be one of the key players in the housing market collapse.
Although many lenders have stopped offering stated income mortgage loans, you will still find a few lenders that do offer stated income loans. The specific segment that benefits most from the stated income loans are individuals who are self employed or small business owners. Individuals who are working for themselves often aren’t able to document their income with W-2 forms that traditional mortgages require.
A ratio that is commonly used to determine loan eligibility for non-stated income loans is the debt to income ratio. If this ratio is too high, the borrower is deemed too risky for the loan. Entrepreneurs who are self employed often have a large amount of debt because of business loans that they might have. This can often make skew their debt to income ratio negatively affected their loan application.
If you are currently looking to apply for a stated income home equity loan, it is important that you consider the pros and cons of applying for one. Although you might be able to state your income in the loan application, there are often a number of other requirements that you need to go through in order for your loan to be approved.
Steps to Getting a Stated Income Mortgage
Although the name of the loan suggests you don’t need to show proof of income in the application, this is far from the truth. The stated income mortgage loan usually requires two years or more of annual earnings. Instead of showing the bank an annual income with a pay stub and W-2, the borrower will need to provide tax returns and bank statements.
These steps are designed to ensure that borrowers aren’t claiming they have money that does not exist. You will also need to disclose all of your profit/loss statements that you have with the business. The borrower will also have to list all of the assets and debts that they currently have. All of your current properties and any debts that you have need to be listed in the loan application.
Since the housing crash many lenders are skeptical about offering these state income loans to borrowers with poor credit. A good credit rating is essential if you are looking to get approval for a stated income loan. Lenders want to see a history of good credit before they will offer one of these higher risk loans.
Individuals who are looking to apply for a stated income loan should be prepared to pay a premium on their interest rates. As a general rule of thumb, the less information you show on your loan application, the more risk the lenders bear. This risk is passed on to the borrower in the form of a high interest rate for the loan.
Other Loan Types
No-Ratio Loans – Another type of loan that you will come across is the no ratio loan. In this loan type you are not required to verify your income throw any pay stubs, tax returns or W2s. The lender takes the approach of not asking what the borrower earns in the application. The reason these loans are called no ratio loans is because the debt to income ratio is not calculated in the application.
In the loan application for a No ratio loan the borrower will have to list their assets that they own. Any stocks, money in the bank, real estate, and businesses will be listed in the application. Usually the lender will require some paperwork to verify the assets that are being stated in the loan.
The main reason the no-ratio loans exists is to provide an easy way for high credit worthy borrowers to get access to a loan. This is not a loan that is designed for marginal borrowers who are looking to get a loan approved. This is the loan designed for the small business owner who doesn’t want to deal with all the paperwork of getting their financial statements in order for the loan application.
No Income/No Asset Verification (NINA) Loans – These are the riskiest loans on the market for lenders. Because there is no verification of the borrower’s income or assets in the application, the lender is relying on the borrower’s credit score. This is a loan that is not intended for anyone who isn’t a trustworthy borrower.
The difference between the no ratio and NINA loans can become quite blurred depending on the lenders criteria. These loans are designed for the borrowers who are looking to have complete privacy in their loan application. A person why doesn’t want the banker looking through all their private information would consider one of these loans.
Beware of Predatory Lenders
Anytime you see a loan advertisement that promises a guaranteed low doc or no doc loan you should think twice. These loans should only be given out to the best credit worthy borrowers. If a lender is offering a low documentation loan to an average borrower you should think twice about applying.
Finding a trustworthy mortgage broker will ensure that you don’t get taken for a ride when you are applying for loans. Always be on the lookout for balloon interest rates that start initially low, but inflate up after a period of time. These predatory lending practices are one of the main reasons why the housing market crashed.
Although stated income loans can be difficult to find, they are still a great option for a certain segment of the population. If you think you can qualify for a stated loan you should consider look at the different lenders that offer the loans. Be prepared to pay a higher interest rate than the traditional loans that are available from lenders. Compare different lenders to try and find a rate that will work best for you.
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