Under most conventional loans, as well as Federal Housing Administration and Veteran Affairs loans, the applicant’s income must be verified by obtaining proof of employment and income by accessing the applicants pay stubs and W-2 forms. However there is a riskier loan process that bypasses this all together, a Stated Income Loan.
What is a Stated Income Loan?
A Stated Income Loan, also known as”alternative documentation loans,” “portfolio programs,” “alternative-income verification loans” and “asset-based loans” , is a loan in which the lender does not verify the borrowers tax records, or income. Instead, when asked these questions the borrower is simply taken at their word. These loans were originally intended for use by self- employed borrowers, or other borrowers who might have difficulty in documenting their income. Stated Income Loans have been extended to a variety of loan types with a variety of credit histories from the borrowers.
Another niche that Stated Income Loans fill is enabling a real estate investor to own multiple properties and while only earning a small amount of money more than the loan payment can still have a considerable amount of disposable income, especially when dealing with higher cost area’s. Naturally a normal lender would red flag this as an indiscretion as the debt to income ratio would not be in- line.
If a borrower’s income is not seen as reliable, and stable this could cause another red flag to appear in the system as lender’s once again try to avoid as much risk as they can. However, the lender may not include potential income increases, or situations like an investor who consistently earns capital gains.
What is Required for a Stated Income Loan?
In almost all situations the lender will still seek to verify that you are employed, either by calling your employer, or in the case of individuals who are self employed a CPA letter. This is important because they will compare your job title to the stated income you provide. It is actually quite common for a mortgage to be declined on the grounds that the income did not match the job description given.
To prevent fraud, a bank or lender can ask you fill out a IRS Form 4506 which in layman’s terms authorizes the lender to request verification from the IRS of your previous tax returns for at least two years. It is worth mentioning that the lender does not have to file the IRS Form at the time the application as they sometimes request the form as a deterrent to a fraudulent borrower. However if they do decide to pull the form even after the application is approved, you can still be charged with fraud. This is most common for lenders to do if you become delinquent on the loan in a short period of time.
If you do choose this route to obtain a loan it is normal to pay a premium towards the lender as your stated income presents more risk and lenders may also choose to raise interest rates higher then one would see on a fully documented loan. Because of recent credit tightening world wide it is easy to see how stated income loans have become much more selective and restricted. Don’t be surprised if you find yourself requiring a larger downpayment or needing a higher credit score before the lender will allow a Stated Income Loan.