If you are preparing to purchase a new home or if you are interested in refinancing your current mortgage, you understandably may be researching loan programs and requirements. Between FHA, VA, conventional and other types of residential loans, you have a wide range of choices available. However, these and other common loan programs generally are full-doc programs, which means that a full list of common documentation is required as part of the loan process. An alternative to this is a stated income loan. A closer look at what a stated income loan is and how it works may help you to determine if this option is right for you.
What Is a Stated Income Loan?
When you apply for a mortgage, the lender generally reviews a wide range of information in order to determine if you meet their specific lending requirements. These requirements are designed to minimize the lender’s exposure to risk. Each defaulted mortgage results in financial loss to the lender, so lending requirements are designed to weed out applicants who may be more likely to default. One of the many factors that lenders look for in a full-doc program includes your income level in relation to your expenses. Income in a full-doc loan is calculated through a review of tax returns, paystubs and other supporting documentation. In a stated income loan, income is pulled off of the applicant’s loan application, and it is not substantiated through verifying documents. However, your stated income must be accurate and truthful.
Common Documentation Required with a Mortgage Loan Request
Each lender and loan program have slightly different documentation requirements, but you will find some general uniformity with most residential loan programs. For example, a loan application and a credit report are commonly required. With a full-doc program, at least two years of tax returns and two to three months of bank statements are required. A divorce decree as applicable, business tax returns,
Is a Stated Income Loan Right for You?
Now that you understand how a stated income loan works and what information may be required during the home loan process, you may be wondering if this type of program is right for you. As you might imagine, a stated income loan is riskier for a lender to make. This risk is reflected in a lower loan-to-value and a higher interest rate in many cases. Therefore, you may need to have a larger down payment available and be agreeable to a higher interested rate. You may also need a higher credit score to qualify. A stated income loan is often most well-suited for self-employed individuals and for others whose take-home income may not be fully reflected in supporting documentation. It is also a good financing option for those who need to close quickly and who prefer or need a less stressful loan process. However, stated income loans have become less commonplace since the last major recession in 2007 and 2008. Home lenders have generally tightened their lending requirements and are more thoroughly analyzing loan documentation. Therefore, if you are interested in applying for a stated income loan, be aware that you may need to search diligently to find this type of loan program.
Applying for a home mortgage can be a stressful experience, and a stated income loan may be an easier option for many applicants. However, this option does not always yield the most affordable mortgage payment. Before applying for your new mortgage, consider exploring all of the options carefully and consulting with a few different mortgage experts for insight and guidance.