When you go shopping for a mortgage, it has been traditional that the lender request documentation of your assets, your employment and your annual earnings. Lenders would seek verification on these three issues through communicating with your employer, requesting proof of your assets and perhaps reviewing the last few years of your tax returns to establish your annual income.
One of the ways that lenders have sought to make loan packages more attractive is to lower their expectations on documentation. A “stated income loan” is one in which you provide your household income figure to the loan officer and no verification is required. Other information requirements may still require verification. At the very extreme of the range of loan verification types is the “no doc” loan, which requires no documentation of income, of assets or of employment.
Lenders offer loans such as “stated income mortgages” in order to draw subprime borrowers whose income may be due to a recent hire or whose income is erratic – such as the salesman who makes two or three big commissions each year. Naturally, lenders view loans with weaker documentation as riskier. To offset the perceived risk they will counterbalance the lack of documentation with other features such as credit score, the loan type or the down payment.
A stated loan program may be available only for ARMs of a certain type or may require a higher down payment than a loan to a similar borrower who is providing full documentation. The interest rate will be higher than that provided for a fully documented loan to a similar borrower; usually in the neighborhood of .15 to .20 of one percent.
Stated income mortgages are the most common of the loans issued with less than full documentation. The rule for this disclosure component is that income is disclosed and the source of the income is verified, but the amount is not verified. Self-employed borrowers will often choose the stated income program because their tax returns don’t reflect the actual cash flow they have available to pay their mortgage. It has been a traditional requirement for a mortgage seeker to have held the same job for two years. People who have recently changed jobs or been promoted are also good candidates for a stated income loan.
Under stated income documentation, assets must be verified. The borrower must have sufficient assets on hand (cash available) that meets a certain standard such as six months’ stated income and 2 months of expected monthly housing expenses. Under a stated income program, the lender is establishing the borrower’s qualifications for every loan benchmark but income as claimed. It is the least risky of the less-than-full documentation loan options out there and the choice that often makes sense for self employed or commissioned employees, or for newly promoted workers on their way up the career ladder.