We are hearing rumblings in the local and national real estate markets about the return of “stated income” loans (a type of “low documentation” loan) although I’m not aware of any of my clients recently obtaining one of these mortgages.
According to a recent Reuters.com article, “stated income” mortgages are making a comeback as lenders are trying to find ways to boost loan applications, which are forecast to be 30% lower than in 2013. (The falling volume of loan applications has been blamed primarily on both the increase in interest rates in 2013, and tougher qualification standards.)
What are stated income loans?
“Stated income” loans allow mortgage applicants to state their income, and show bank or brokerage statements as proof of their income. Typically lenders require much more documentation to corroborate a borrower’s income, including at least a couple of year’s tax returns and pay stubs.
As with a traditional loan application, the lender will still verify the borrower’s employment.
Borrowers of a stated income loan will generally have to put down a higher down payment, have a higher credit score (typically about 700), and will pay a higher interest rate (typically ½ to ¾ of a percentage point higher than a conventional mortgage) due to the higher level of risk the bank assumes by granting these kinds of loans.
What type of borrower(s) like stated income loans?
Stated income loans are geared towards small business owners and other self-employed individuals whose tax returns don’t necessarily illustrate their ability to repay a loan. (Many self-employed individuals keep income in their businesses to reduce their own personal income taxes.)
The difference between today and 2008
Lenders offering stated income loans are saying that this is not the same loan product that was widespread before the housing bust. Many in the industry joke that before 2008, a borrower basically had to show that he or she had a pulse to qualify for a stated income loan.
Today, there are much more stringent qualification standards. To illustrate your ability to repay, the borrower generally must show that they have assets on hand to cover 6 to 12 months of mortgage payments. To reduce the probability of default by a borrower, banks are requiring much higher downpayments than the pre-2008 requirements.
Not all financial institutions are jumping on the stated income bandwagon at this point, including the 3 biggest banks in the U.S., JP Morgan Chase, Bank of America and Citigroup.