Stated income loans were widely blamed for the fall of the housing market in 2008 and the recession that followed. But a lot has changed since then. These types of loans are making a comeback—except with significant modifications of this time around. Those who own a business or are self-employed can safely use stated income loans to fund residential and commercial property investment projects in 2021.
These loans are precisely what their name suggests—they are mortgages based not on the borrower's 'verified' income but their 'stated' income.Before the 2008 housing collapse, many lenders and borrowers abused this kind of loan to excess. Qualified self-employed borrowers and speculators used them, buyers with no credit or poor credit, flippers, and scammers. Lenders did not bother to verify an applicant's income, employment, or assets, lending amounts of money that borrowers had no way of ever paying back.Some lenders even allowed people to borrow as much as 125% of the property's value. Home prices, in particular, rose at lightning speed as the real estate market saw a rush to buy, buy, buy.Back in those days, there was little incentive for Wall Street and many lenders to tighten lending criteria because such loans were easy to sell on the secondary market. But all this negative equity proved to be unsustainable. Many people eventually felt trapped because they could not refinance or sell, left with no choice but to default on the mortgage.First-generation stated income loans were indeed recipes for disaster; it's easy to see why they still carry a stigma. These mortgages have become associated not only with the real estate bust but also with massive default rates.
The government—reeling from the effects of the housing market crash—signed into law the Dodd-Frank Act, which implemented stricter controls on which borrowers can qualify for mortgages. The law created a new and so-called safer type of mortgage called the QM (qualified mortgage).The main point of QM is that it requires lenders to verify an applicant's ability to repay the amount they are borrowing via W2s, the 1090s, or tax returns.While the law sought to make the lending environment safer, it had the unintended effect of shutting out many qualified people from mortgage loans—particularly business owners and investment property buyers.There are 25.5 million self-employed Americans paying taxes in the US, and many of them don't qualify under these rules because they don't have the documentation required by QM lenders. This doesn't necessarily mean that the self-employed borrowers are financially unsuccessful; it's just that many of them maximize their legal tax deductions, thereby minimizing their taxable income. Many of them also reinvest their earnings in their businesses, sometimes showing losses on their latest tax returns.QM also put investment property buyers out of the game. Many of these investors struggle to produce documentation to prove sufficient income. They know they can cover the payments with the rent received on the investment property, but their tax returns don't demonstrate enough income, so they don't qualify for commercial investment property loans.
The good news is that stated income loans have been revamped, and they are safer than ever. For these types of borrowers, a stated income loan may well be the best option.These days, underwriters of stated income loans look at four factors when evaluating an application: The borrower's (1) credit score, (2) liquidity, (3) loan-to-value ratio, which refers to the amount they want to borrow relative to the property's value, and (4) their income.Even if you show weakness in any of these four legs, you may still qualify for a stated income loan if the other three are strong enough.For example, even if you can't show substantial income, you may still be considered a suitable applicant if you have an excellent credit score and are prepared to make a sizable down payment from the money you have in the bank.Because of these more stringent underwriting practices, default rates for stated income loans have dropped significantly. Even in this pandemic, borrowers have been able to pay their monthly obligations.The success of this new model is attributed to the fact that stated income loans are now based mainly on the borrower's credit score and ability to put significant equity into the property. Research shows that good credit and a low loan-to-value ratio are the two most vital indicators of a borrower's mortgage creditworthiness. When people have skin in the game, they're more likely to make good on their payments.
A stated income loan may be a practical option for a buyer who has cash for a sizeable down payment but does not have sufficient documents to prove a steady income required by traditional mortgages. This applies to many small business owners, professionals with fluctuating incomes, and freelance or gig workers.Do note that while stated income loans have many benefits, they require a high down payment. Mortgage rates on these loans also tend to be higher compared to rates on qualified mortgages. Make sure you understand this before making a decision.
Stated income commercial loans can be an excellent alternative for borrowers who cannot provide proof of sizeable and steady income for some reason or another. Capital Investors Direct can help you secure your funding you need. If you're interested, submit your application today with the following documents:
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Our Stated income commercial loans can be used for many asset classes, including multifamily, retail, mixed-use, office, and commercial properties.Loan amounts range from $150,000 to over $5,000,000. Talk to us today!
