Mortgages Part 4C: Full Documentation and Stated Income Loans
When you apply for a mortgage, you will have to show the bank where your money is, and how much you make a month so the bank can decide whether you can afford the mortgage. The lender will want to see your bank account statements, copy of your W2, paystubs, and tax returns.
It is pretty simple for you to provide all that information if you have always held a job with a paycheck. In this case, you will apply for a full documentation loan. For a fair number of people, providing full documentation is quite hard. That include small business owners and anyone who is self employed. It may also be difficult if you make most of your money in commissions instead of a salary. If this is you, you may need to apply for a stated income loan.
What are the requirements for a Stated Income Loan?
When you apply for a stated income loan, you only need to state what you do and how much you make. For that reason, stated income loans got a bad rep during the boom years and were referred to as “liar’s loans” because it is suspected that many borrowers fudged the numbers in order to qualify for a mortgage.
Nowadays, the banks have much stricter guidelines when it comes to stated income loans. The lender will ask for your tax returns to get an idea of how much you made the previous two years. Self employed borrowers are required to complete the IRS form 4506, which allows lenders to request tax transcripts from the IRS directly.
One benefit of being self employed is that you can claim business expenses on your tax returns and pay less taxes. However, if you had $100,000 in income last year, and claimed $90,000 in deductions, it will be almost impossible for you to get a loan based on that $10,000 net profit.
The lender may also turn down your loan if they do not believe the income you stated. For example, if you are a doctor, it is believable that you are making $50,000 per month. But the lender may not believe it if you are a graphic designer making $20,000 per month.
As for your assets, banks want to know where your money comes from. Expect to explain deposits made in your bank account, especially if you sometimes mix your personal and business spending.
Stated income loans usually require a larger down payment, a higher credit score from the borrowers, and charge a higher interest rate. Due to all the above complications, if you are self employed, you should plan ahead and have your documentations ready. Talk to a loan officer early and they can help you prepare your finances.
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