Are you self-employed or a real estate investor struggling to secure a mortgage?
Fear not! While traditional stated income loans are a thing of the past, innovative alternatives have emerged to help you achieve your homeownership dreams. Say goodbye to the days of strict income verification and hello to a world of home buying possibilities.
From bank statement loans to asset depletion mortgages, discover how these modern financing options are tailored to your unique needs and can unlock the door to your perfect home.
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Stated income loans are mortgages that don’t require borrowers to provide traditional income verification, such as pay stubs, W-2s, or tax returns. Instead, borrowers simply state their income on the application, and mortgage lenders take them at their word without verifying the accuracy of the information provided.
Stated income loans gained popularity in the early 2000s as a way for borrowers with complex financial situations to qualify for mortgages.
However, they played a significant role in the 2008 housing crisis. Many borrowers overstated their incomes to qualify for larger loan amounts, and when the housing bubble burst, these borrowers were unable to keep up with their mortgage payments. As a result, there was a wave of defaults and foreclosures.
Dodd-Frank Act of 2010 prohibited lenders from making loans without verifying the borrower’s ability to repay. This effectively ended the practice of true stated income loans.
In 2024, true stated income loans are virtually nonexistent in the mortgage market. Loan officers are now required to verify a borrower’s income and assets to ensure they have the ability to repay the loan.
Some lenders may still advertise “stated income loans,” but these are not the same as the no-income-verification loans found prior to the 2008 housing market crash. Today’s “stated income” loans still require some form of income documentation, such as bank statements, tax returns, or a letter from a CPA. They may also come with higher interest rates and down payment requirements to compensate for the added risk to the lender.
While true stated income loans are a thing of the past, there are alternative loan options for borrowers who don’t fit the traditional mortgage mold. In addition to traditional loans and government-backed mortgage programs, borrowers may consider non-qualified mortgage (non-QM) loans.
Ideal for self-employed borrowers or those with variable income, bank statement loans use 12–24 months of personal or business bank statements to verify income instead of tax returns.
Lenders offering bank statement loans will typically review 12–24 months of your personal or business bank statements to determine your average monthly income. They may also require a profit and loss statement (P&L) to get a better understanding of your business’s financial health.
Also known as asset-qualifier loans or asset-based mortgages, these loans enable borrowers to be approved on the basis of their liquid assets rather than their income. The lender uses a formula to calculate the borrower’s monthly income from their assets.
With an asset depletion loan, your lender will total up your liquid assets (such as checking and savings accounts, investments, and retirement accounts) and use a formula to determine your monthly income from these assets. Typically, they will divide your total assets by 360 (the number of months in a 30-year loan term) to calculate your monthly income.
Designed for real estate investors, this type of loan qualifies borrowers based on the projected income of the rental property they’re purchasing rather than their personal income.
With an investor cash flow loan, your mortgage lender will use the investment property’s projected rental income to determine your ability to repay the loan. They may require a rental analysis or appraisal to estimate the property’s potential rental value. The lender will then use a formula (such as the Debt Service Coverage Ratio, or DSCR) to ensure that the property’s income can cover the mortgage payments and other expenses.
Fannie Mae and Freddie Mac, the two main government-sponsored enterprises that purchase mortgages from lenders, do offer conventional loans to self-employed borrowers. However, these loans typically require more extensive income documentation compared to stated income loans.
Self-employed borrowers applying for a conventional loan will usually need to provide 1-2 years of personal and business tax returns, along with a year-to-date profit and loss statement (P&L) and balance sheet. The lender will use these documents to calculate your income and determine your ability to make monthly mortgage payments.
Government-backed loans, such as FHA, VA, and USDA loans, can also be an alternative for self-employed borrowers or those with complicated financial situations. These loans typically have more lenient credit score minimums and down payment requirements compared to conventional loans.
However, like conventional loans, government-backed loans will require you to document your income with tax returns and other financial statements in lieu of pay stubs. The specific documentation requirements may vary depending on the loan program and your individual circumstances.
Real estate investors frequently use hard money loans—short-term loans from private lenders—for fix-and-flip or renovation projects. These loans typically have less stringent income documentation requirements compared to conventional mortgages.
Hard money lenders focus primarily on the value of the investment property being used as collateral rather than the borrower’s income or credit score. They may require a down payment of 20–30% and charge higher interest rates and fees compared to traditional mortgages. Hard money loans are usually short-term, lasting from a few months to a few years.
It’s important to note that while these state income mortgage alternatives may have less stringent income documentation requirements compared to conventional mortgages, they often come with higher costs and risks. Home buyers should carefully evaluate their options and work with a knowledgeable lender or financial advisor to determine the best financing solution for their individual needs and circumstances.
Subprime loans are designed for borrowers with lower credit scores or other factors that make them a higher risk to lenders. These loans may have more flexible income documentation requirements but often come with higher interest rates and fees.
Similar to hard money loans, individual investors, investment groups, and non-QM lenders underwrite private money loans. These loan options can be more flexible in terms of income documentation but may have higher interest rates and shorter repayment terms.
In some cases, the seller of a property may be willing to offer financing to the buyer. This can be an alternative to a traditional mortgage and may have more lenient income documentation requirements. However, the terms of seller financing can vary widely and may not be as favorable as other loan options.
When searching for alternatives to stated income loans, it’s essential to work with lenders who specialize in non-traditional mortgage products. These lenders may be more familiar with the unique financial situations of self-employed borrowers, small business owners, real estate investors, and others who might have benefited from stated income loans in the past.
If you’re considering refinancing a stated income loan on your primary residence, be aware of potential challenges due to stringent underwriting standards. Benefits of refinancing include lower interest rates, better loan terms, and the option of cash-out refinancing if you have built enough equity.
True stated income loans, where no income verification is required, no longer exist. However, some lenders may offer alternative loan programs that use non-traditional methods to verify income, such as bank statements or assets.
What are the risks of stated income loans?The main risk of stated income loans is that borrowers may overstate their income to qualify for a larger loan amount than they can afford. This can lead to default and foreclosure if the borrower is unable to make their mortgage payments.
Do alternative loan programs have higher costs?Yes, alternative loan programs often come with higher interest rates, larger down payment requirements, and stricter qualification criteria compared to traditional mortgages. This is because they are considered higher risk for lenders.
Can I qualify for an alternative loan program if I'm self-employed?Yes, alternative loan programs like bank statement loans are designed for self-employed borrowers or those with variable income who may have difficulty qualifying for a traditional mortgage. However, you will still need to meet the lender’s credit score, debt-to-income ratio, and down payment requirements.
Choosing between a conventional loan and an alternative-income loan can be a game-changer for your homeownership goals. While these specialized programs cater to those with unique income situations, they do come with a slightly higher price tag.
But don’t let that deter you! The benefits of securing your dream home far outweigh the minor drawbacks. If a traditional loan is out of reach, don’t wait another moment to explore your home-buying options.
Start your journey now and discover the perfect mortgage solution tailored to your needs. Your dream home is closer than you think!