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Qualifying for a loan is typically a tedious process that involves gathering a lot of documentation. If a bank lends you money, they want to make sure it’ll get paid back – fair enough.
But what about borrowers who have a more challenging time proving their income, such as self-employed or small business owners? Let’s look at stated income loans, how they work, and who is eligible for this financing opportunity?
What Is a Stated Income Loan?
A stated income loan – also known as a liar loan – was a type of loan that does not require the borrower to show documentation proving their income. Borrowers stated their income, and banks would use it to decide the loan amount and rate.
Stated income mortgages were handy for self-employed borrowers who might have difficulty qualifying for the loans they need because of fluctuating income and tax deductions. Although stated income loans were widely popular in the early 2000s, they were also a significant contributing factor to the 2008 financial crisis.
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How Do Stated Income Loans Work?
Initially – as the name suggests – stated income loans only required borrowers to state their income. Lenders didn’t collect tax returns or ask for concrete proof that the number given by the borrower was accurate. The lender would then push the provided information through underwriting to determine the loan amount, interest rate, and other critical loan terms.
Unfortunately, stated income loans got out of hand due to the relaxed requirements and greed by big banks, corporations, and mortgage lenders. Borrowers were stuck with monthly mortgage payments they could not keep up with despite qualifying for the mortgage.
Can You Still Get a Stated Income Loan?
These loans are still around in 2022, but they look a lot different than they once did. Stated income loans are no longer allowed for the purchase of owner-occupied properties. This change came about due to the Dodd-Frank Wall Street Reform and the Consumer Protection Act of 2010. However, stated income loans are still a viable option for mortgage investors.
How to Qualify for a Stated Income Loan
Online mortgage lenders may be more flexible on the proof of income side, but borrowers still need to meet other requirements to qualify for a stated income loan. If you’re looking to purchase a non-owner-occupied property, here’s what you can expect to qualify:
- Credit score and history – Lenders will typically require a credit score of around 680. Lower scores may result in a higher interest rate.
- Down payment – Depending on the lender, borrowers may be required to put down 10% or more.
- Debt-to-income ratio – The maximum DTI ratio varies between lenders but expect to need a DTI lower than 55%.
Stated Income Loans for Real Estate Investors and Investment Properties
Since 2010, only investors have been able to take out stated income loans. Today, these loans are referred to as bank statement loans. This type of loan makes it easier for flippers, landlords, and investors to secure financing with less hassle.
It also offers more flexibility. Needing to make repairs or move fast on a can’t-miss investment opportunity are just a few reasons investors would want to go with a stated income loan. Investors can always go the hard-money route, but these loans typically have higher interest rates and shorter terms.
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Alternatives to Stated Income Loans
If you’re a self-employed borrower, stated income loans might look very attractive. While they’re no longer available to borrowers looking to buy a house for themselves, some alternatives still make homeownership feasible.
Bank statement loans allow borrowers to show business and personal bank statements instead of tax returns. You can also use other qualifying factors such as your credit score, down payment, and cash reserves to get the loan you need. These loans are typically offered through non-qualifying mortgage lenders, meaning the loans can’t be sold to Freddie Mac or Fannie Mae.
Moreover, if you are a first-time home buyer, you should look at government home loan opportunities and traditional mortgage financing. There are a ton of programs available with flexible qualifying requirements. All it takes is a little bit of research. Here are a few programs you should look into:
Are Stated Income Loans Illegal?
Stated income loans are not illegal, but they are more regulated than they were in their heyday. Only investors looking to purchase a non-owner-occupied property can get stated income loans. This is a great financing option for those eligible, but one that is not available to the average person looking to buy a home for themselves.
Bottom Line: Stated Income Loans
While no longer an option for owner-occupied purchases, stated income loans are one-way investors can secure financing. The flexibility and looser qualifying requirements make it an attractive option, but one that should be handled responsibly. Self-employed borrowers can check out bank statement loans as an alternative to traditional loans.