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Stated Income Loans Five Things You Need To Know

If you're a borrower in good standing then the odds are overwhelming that you can get a mortgage without a lengthy look at how much you make. In fact, most lenders will simply take your word for whatever income you say you have.

 

A large percentage of all mortgages are now made with "stated-income" loan applications, applications which require less paperwork and speed the lending process. According to a study of borrowing in the third-quarter of 2006 by Standard & Poors, 69 percent of all "Alt-A" loan applications -- the applications from folks who don't need subprime loans -- used "stated income" paperwork. These applications generally required no written verifications for income and no tax returns.


Mortgage lenders, however, do not make such loan applications to everyone. You have to be a strong borrower.


S&P found that the model Alt-A borrower had a credit score of 707 and that a typical loan had a 75 percent loan-to-value ratio (LTV). In other words, most borrowers were refinancing with substantial equity in the property or were buying with solid down payments.


Lenders welcome stated-income loans because of the high credit scores they typically require as well as the borrower's strong equity in the property. Stated income loans are especially helpful for self-employed borrowers, individuals without pay-stubs or W-2 statements that can be easily checked.


While stated-income loan applications make the lending process quicker and easier, there's a lot of misinformation regarding such forms and the result is that some borrowers miss the opportunity to use stated-income loan applications while other borrowers might be better served with other types of applications.


As a borrower you want to know what type of stated income application you're getting -- there are different types and the difference can be important to individual borrowers. Also, you want to know about such things as speed, possible cost, the need for accuracy and tax records. With a better understanding of how the system works borrowers can make better choices.

Is a stated-income loan application for you? Here are five basic issues to consider:

1. Not all "stated income" loan applications are alike.

The term "stated-income" is used generally, as is a similar expression, the "no doc" loan. However, there are different loan application formats with different requirements.


2. Stated-income loans may cost more

Although stated-income loan applications often involve transactions where borrowers have solid down payments, substantial credit and significant equity, loans without verifications are still risky -- more risky to most lenders than boring, old-fashioned loan applications where borrowers must provide full documentation.


3. Stated-income claims may be checked.

A stated-income loan application is not a free-pass for financial fantasies. While it's true that most stated-income/stated asset loans are not individually reviewed, some are.


4. You need current and proper tax records

Lenders will not knowingly advance money to anyone who has failed to file tax returns or claims income they have not reported. The reason? When a property is financed the loan is secured by the property. A mortgage lender typically has a first or second lien -- if the property is sold at foreclosure the entire first loan must be repaid before any money is used to repay the second loan. However, tax liens must be paid before mortgage liens when a property is sold or foreclosed so lenders want to make certain that borrowers have paid their taxes in full.


5. A stated-income loan application will save you time. But do you need to save such time?

But consider this idea: How will you benefit from quicker processing? Neither buyers nor sellers are likely to want a settlement next week. Buyers want time to pack, move and often to sell the current residence. Sellers want time to pack, move and often to find a replacement property. Quicker processing is sometimes not a practical advantage, a factor to consider when deciding what type of loan application to use.

By Diane Tuman

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  • Last edited October 12 2012
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