Many people associate stated income loans with the mortgage meltdown of 2008, and this is not surprising. After all, stated income mortgages played a massive part in the housing market crash and the recession that followed it.Banks have since stopped issuing these types of loans for owner-occupied properties. The government also passed several laws to make sure that nothing like the 2008 fiasco ever happens again.Among the most notable legislations was the Dodd-Frank Act that took effect in 2010. To this day, it continues to heavily regulate lenders and banks while preventing people from buying properties they could not afford. The law has largely been successful in eliminating sketchy lending practices.However, the Dodd-Frank Act keeps qualified buyers—particularly self-employed individuals, small business owners, and real estate investors—from getting property loans because they cannot present proof of income, tax returns, pay stubs, or W-2s.If you belong in this group, you know very well that it can be difficult to produce the documents that traditional banks typically ask. Perhaps you don’t seem to pay a lot in taxes because you have a great accountant who has found many ways to lower your tax obligations legally. Maybe you at earn a small salary but make most of your money through commissions.Perhaps your income fluctuates. Or maybe you reinvested your earnings back into your business. Whatever the case may be, it can be not easy to qualify for traditional mortgages if you don’t have the papers required by conventional lenders.The good news is that stated income loans are available for borrowers like you. This blog explains what this type of loan is, how you can qualify, its advantages and disadvantages, and where you can get it.
Stated income loans are precisely what their name says—they are loans that are not based on your ‘verified’ income but your ‘stated’ income. They don’t require tax returns or income documents for self-employed borrowers, property contractors, and real estate investors.So how do lenders vet their applicants and decide whether or not someone is creditworthy? The answer is simple: They look at your credit score and how much you have in savings. If you have a reasonably high credit score and a lot of liquidity that will enable you to make a substantial down payment, then you are an ideal borrower.Stated income loans are not available right now for owner-occupied properties. However, you can use them for buying investment properties such as non-occupying rentals. This is why they have become very popular with real estate investors.
Stated income loans are very popular with real estate investors and small business owners who want to use the funds to grow their equity in cash-generating rental properties.They are also widely used by landlords and property flippers with multiple write-offs on their tax returns. These financing instruments allow them to buy investment properties even without comprehensively documenting their income. If you belong in these groups, then a stated income loan might be a good option for you.
Many investors use this kind of financing to flip a property, buy another rental property to grow their portfolio, or fund a renovation on a property that they tend to sell right away.Some borrowers also use these loans as temporary financing because they expect a significant cash advance or payout soon but need funds right away to snap up a particular real estate investment.Many real estate investors don’t want to spend money to purchase property using stated income loans. This way, they can free up their capital for other investments.
To qualify for a stated income loan, you need to show the lender that you have the following:
The more solid your financial situation is, the more likely you’ll qualify.
Perhaps the biggest drawback of this type of loan is that it requires a substantial amount in down payment—usually upwards of 30%. Compared to a traditional mortgage, the closing costs associated with stated income loans are also higher.Applicants likewise need a substantial amount of cash in savings and a reasonably high credit score to improve their chances of getting approved.
There are alternative loan types that are similar to stated income loans. They’re also called ‘bank statement loans,’ ‘alternative income verification loans,’ or ‘alternative documentation mortgage loans.’Bank statement loans are designed for borrowers who receive income from many different sources, such as self-employed professionals and freelancers. They are reasonably affordable and quite flexible. Their advantage is that you can use them to buy or refinance a home (unlike stated income loans that cannot be used on owner-occupied properties).To qualify for a bank statement loan, applicants must show that they have been in business for at least two years. The minimum credit score is usually 600. They also have to provide your business license, expense ratio, 12 months of personal bank statements, 24 months of business bank statements, and a signed letter from a certified public accountant stating that they are still in business.
Whether you’re a freelancer, and a small business owner who is just starting, or a real estate investor, you can use either a stated income loan or a bank statement loan to finance your project. The best choice depends on your situation, but in general, stated income loans are much better for buying rental properties and other investment properties that you will not occupy yourself. This is why real estate investors widely use them. Stated income loans are widely available for commercial properties, with loan sizes starting from $150,000 and going up to $5M and more. They can be great options for purchasing multifamily buildings, mixed-use to real estate, retail, and office spaces, and other commercial property assets. Talk to a commercial mortgage expert to learn more about your options.
