Stated Income Loans
Question: What’s the deal with stated income loans? If I can’t qualify for a full-doc loan (the cheapest) how am I supposedly qualified for a more expensive stated income loan? It makes no sense to me. Specifically, we were interested in a option ARM loan because of the low monthly payments and the 1.45% interest rate. Even though our income is about 4 times as much as what the proposed minimum payments would be, we were told that our income was insufficient because to qualify for such a loan, we were told that our P.I.T.I. (principal, interest, taxes & insurance) and consumer debt needed to be less than 38% of our income. It was suggested that we go stated income which is more expensive. If the solution is all that simple, why doesn’t everyone who can’t qualify for the cheaper loan go this route? Are there limits as to the income that one can “state” and what lenders will accept as fact?
Answer: The purpose of stated income loans is to provide loan programs
for those individuals who can’t easily document their income e.g., cash operations
like “the mom and pop” stores, or occupations heavily dependent on tips like waiters,
cab drivers, exotic dancers, and other seIf- employed individuals with irregular cash
flows where bank statements, tax returns, and W-2’s don’t accurately reflect one’s
income. These programs, also, make it possible for individuals to “fudge” their
income (within certain parameters) to get a loan that might otherwise have been
beyond their ability to qualify for if they were to go full-doc. Because they are riskier
for the lender since there is less in the way of proof that the person actually makes
what they purport to make, the lender charges more to off-set the added risk. As was
suggested, the solution for you may well lie with going “stated income”. Another
alternative may be to go from a 30 year term to a 40 year. This would lower your
minimum payments and also the qualifying amount at the fully-indexed rate.
Finally, yes there are limits as to what lenders will accept as plausible regarding one’s
income. Stated income loans are rife with conflicts of interest for loan officers and
borrowers alike. If asked, the lenders reps, many of whom are former underwriters
are willing to suggest to Loan Officers, what is likely “to fly under the underwriter’s
radar” with regard to stating income for a given occupation. If you work as a crossing
guard for an elementary school, they are not about to believe that you have a six-
figure income. Underwriters use compensation guides to ascertain a range of
income norms based on occupation and zip codes. With both reps and underwriters
working for the same firm it is a uniquely schizophrenic situation wherein both sides
are working at cross purposes, and conflicts of interest abound.
In part, this duality stems from the fact that the reps work on commission, whereas
the underwriters are usually salaried. Yet it is critical that the underwriters strictly
observe these guidelines because most loans need to conform to Fannie Mae and
Freddie Mac guidelines so that they can be resold in the secondary market. If the
lender is audited and there are serious discrepancies, the lender is required to buy
these questionable loans back, something lenders are loath to do.
Copyright © 2020 Rod Haase. All rights reserved.