Stated income loans allow borrowers to acquire a mortgage by stating their income without the same verification as traditional loans. While the original high-risk stated income loans haven’t been available since the 2008 housing market crash, and most experts believe these loans were a major contributor to that event, stated income loans recently have made a comeback. Stated income loans are specifically for investors or nonowner-occupied properties. Read on to understand stated income loans and how they could work for you.
What Are Stated Income Loans?
Stated income loans are nonqualified or alt-doc loans for investors who need broader mortgage options. Stated income loans are a type of loan that, prior to 2008, required little, if any, verification. Stated income loans are helpful for investors considering a rental property, house flipping or purchasing an under-market-value property who cannot qualify for a traditional mortgage.
In the past, some stated income loans allowed people to borrow as much as 125% of the property’s value, increasing the risk of default and contributing to the crash. These mortgages were dubbed “liar loans” because the lack of income verification contributed to the housing market downturn.
After the 2008 crash, most banks and lenders discontinued stated income loans. A more conservative version has recently returned, removing the riskiest aspects of stated income loans.
You’re still only asked for stated monthly gross income on a stated income loan application, but employment is now verified. Borrowers generally need to provide bank statements and asset documentation. In addition, interest rates are usually higher than a traditional mortgage loan, depending on the lender. The mortgage application process requires borrowers to demonstrate a good credit score, strong savings and a large down payment.
In addition to stated income loans, those who are self-employed or who can’t prove their income level can consider other types of nonqualified loans, such as:
- Bank statement loans
- Asset-based loans
- Jumbo loans
- No-income investment loans
- Recent credit event loans
- Foreign national loans (ITIN)
- Interest-only home loans
- Commercial rental property loans
How Do Stated Income Loans Work?
Stated income loans work like other nonqualified mortgages but are only available for second homes or investment properties. You can’t get a stated income loan for a primary residence.
The purpose of stated income loans in the lending industry is to allow investors to apply for a mortgage with more flexible documentation. For freelance or self-employed people, retired or with significant asset holdings, stated income loans offer greater flexibility to purchase investments.
With modern stated income loans, borrowers are asked to both state and prove their income and assets, like any other home loan. The methods for verifying income on stated income loans are more flexible than for qualified loans.
Benefits of Stated Income Loans
The benefits of stated income loans include the opportunity for more people to qualify for mortgages for investment properties. Advantages of stated income loans include:
- Self-employed people or freelancers
- People with irregular income
- Simplified the application process
- Reduced paperwork
Drawbacks of Stated Income Loans
With any loan, additional flexibility in requirements usually translates to higher interest rates or fees. The primary drawbacks of stated income loans include:
- Higher interest rates
- Increased risk of default for both borrowers and lenders
- Fees or additional costs may be higher than traditional mortgages
Eligibility Requirements for a Stated Income Mortgage
To qualify for a stated income mortgage today, you must meet criteria similar to traditional mortgages. To determine loan eligibility, lenders look at various factors, such as credit score, debt-to-income ratio, total debt, assets, income and down payment amount.
Requirements vary by lender, but generally, lenders require a 20% to 30% down payment for stated income mortgages.
Common Misconceptions about Stated Income Loans
Because of the market crashes of 2008, stated income loans gained a bad reputation, with some professionals stating that lenders were encouraging fraud with stated income loans, which re different from subprime lending.
According to the Consumer Financial Protection Bureau, a subprime mortgage is a loan that is generally offered to borrowers with impaired credit records. In contrast, stated income loans are offered to borrowers with good credit scores and high asset values, usually for investment in rental properties or other real estate investments. The only similarity between a subprime mortgage and a stated mortgage loan is the potential for higher interest rates.
With a subprime mortgage, the higher interest rate is supposed to compensate the lender for accepting the greater risk associated with borrowers with low or no credit scores. In stated income mortgages, the higher interest rate is also designed to compensate for the additional risk, as a second mortgage with more lenient verification requirements.
How to Apply for a Stated Income Loan
The steps to apply for a stated income loan are similar to a traditional loan. You gather the necessary documentation, apply for pre-approval and compare lenders. Once you've selected a lender, you can complete the online or in-person application process.
To protect yourself and your investments, it's essential to be honest and accurately represent your income. This process reduces your risk of default and allows lenders to calculate maximum loan value accurately.
Documents to apply for stated income loans include:
- Government-issued IDs
- Proof of income
- Bank statements
- Tax returns
- Gift letters (if applicable)
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Using Stated Income Loans
With in-depth market research, purchasing an undervalued property for investment can be a smart strategy to start building financial freedom. Whether you're planning to purchase your first rental property or want to consider house flipping, stated income loans can help. Find the best low-income mortgages or learn more about how to apply for a non-qualified mortgage here.
Frequently Asked Questions
Do banks still do stated income loans?
Banks do offer stated income loans. However, most banks and lenders now require additional validation and verification of lenders to reduce risks. In addition, many banks offer other options for those who are self-employed or those who can’t prove their income through tax returns.
Can I buy a house with stated income?
You can buy a second or investment property with a stated income loan. You cannot purchase your primary residence with a stated income loan. However, if you’re self-employed, you could get another non-qualified mortgage, like a bank statement loan.
How is a stated income loan different from a traditional mortgage?
Stated income loans are different from traditional loans in their methods of verification. Stated income loans help improve borrowers who don’t have traditional pay stubs or can’t verify income with tax returns to secure a mortgage for investment. Lenders may use bank statements, savings, assets or income deposited over a period of 12 to 24 months.
About Alison Plaut
Alison Plaut is a personal finance and investing writer with a sustainable MBA, passionate about helping people learn more about wealth building and responsible debt for financial freedom. She has more than 17 years of writing experience, focused on real estate and mortgages, business, personal finance, and investing. Her work has been published in The Motley Fool, MoneyLion, and she regularly contributes to Benzinga.