Stated income loans help freelancers, self-employed workers, and independent contractors qualify for financing. These financial products allow you to state your income when applying for a mortgage. Knowing how these financial products work can help people without W-2 income qualify for mortgages.
What is a Stated Income Mortgage Loan?
A stated income mortgage loan is a financial product that caters to people who don’t have W-2 income. If you have plenty of 1099 forms and can keep up with monthly mortgage payments, this product may be for you. Borrowers have to state their income and then verify with documents that their stated income is legitimate.
Brief History of Stated Income Mortgages
These loans have always been an alternative route for independent contractors and freelancers who want to buy property. Lenders used to take stated income at face value without running any checks, but after the Great Recession, lenders now require you to verify the income that you state.
How Stated Income Mortgages Work
Stated incomes are like any other mortgage. You must make regular monthly payments until you repay the home loan. The key difference is that you don’t have to provide tax returns or pay stubs to verify your income. Lenders will also consider bank statements, 1099 forms, and other financial documents that verify your income. Lenders still review regular details like your credit score and debt-to-income ratio when considering your application.
How Do Stated Income Mortgages Compare to Traditional Mortgages?
Stated income mortgages offer more flexibility and are easier to obtain, but they tend to have higher interest rates. That’s because lenders have a higher perceived risk when they do not offer traditional financing. You may also have to make a higher down payment for a stated income mortgage compared to a traditional mortgage.
Advantages of Stated Income Mortgages
Stated income mortgages offer several advantages, including these perks.
Flexibility for Borrowers
You can provide several types of financial documents to verify your income instead of only offering your tax returns. This approach is favorable for self-employed borrowers who frequently use tax deductions to reduce their taxable income.
Faster Approval Process
It’s possible to get a stated income mortgage much faster than a traditional mortgage. A quicker approval can help you stand out among buyers and increase the likelihood of sealing a deal.
Benefits for Self-Employed Individuals
Self-employed individuals get to give financial institutions a better idea of how much they earn instead of using taxable income. Showing a higher income will make it easier to obtain financing.
Risks and Drawbacks
No financial product is perfect, and it’s important to know the drawbacks of any product before getting started. These are some of the risks to keep in mind before using a stated income mortgage.
Higher Interest Rates
Stated income mortgage loans come with higher interest rates than traditional mortgages. The higher rate will increase your monthly payments. Some people refinance into conventional home loans in the future, but for now, you will have an elevated rate.
Increased Risk for Lenders
These financial products aren’t only risky for consumers. Lenders also bear additional risk when they give out non-conforming mortgages. They don’t have the protections that Fannie Mae and Freddie Mac provide when they give out conventional mortgages.
Potential for Fraud
Some fraudsters set up lending websites and vanish when you make the down payment. It’s essential to check a lender’s online reviews and history to gauge if they are legitimate.
Eligibility Criteria for Stated Income Mortgage Loans
These are some of the things lenders will review when assessing your application. Making sure you check all of the boxes will make it easier to obtain financing.
Credit Score Requirements
You’ll typically need a 700 FICO score or higher to ensure that you qualify for a stated income mortgage. These financial products have higher minimum credit score requirements to compensate for the extra risk lenders incur.
Income and Employment Verification
Lenders will review your income and employment history to gauge if you make enough money to make monthly payments reliably. Most mortgage lenders look at the previous two years of your employment history.
Down Payment and Equity Requirements
These loans have higher down payment requirements that vary for each lender. You might have to make a 20%-30% down payment to buy a property with this financial product, but each lender is different.
Documentation Requirements
You will have to provide several documents during the application process. Here’s what you will need:
- Government-issued photo ID
- Social Security number
- Proof of income
Lenders will also obtain a copy of your credit report from the major credit bureaus.
What’s the Application Like for Stated Income Mortgages?
The application process for stated income mortgages is straightforward. You will have to provide basic information, such as your name, email, and income. You will have to verify your income with supporting documents. The application process is quick, but going from application to approval should take a few days. That’s in stark contrast to traditional mortgages that can take 30-60 days to go from application to approval.
Alternative Mortgage Options
A stated income mortgage is one of the alternatives to traditional mortgages. However, you have a few additional alternatives to consider.
Bank Statement Loans
These financial products allow you to provide previous bank statements instead of W-2s and tax returns to see if you are eligible for a mortgage. Self-employed borrowers frequently use these financial products, and they may have to provide up to two years of bank account statements.
No-Doc Mortgages
These mortgages do not require the borrower to verify their income and were popular shortly before the Great Recession. While these loans still exist, they are much harder to find and often come with significant down payment and credit score requirements.
Low-Doc Mortgages
These mortgages require very little information during the mortgage application process. Lenders won’t ask for many details about your income, employment history, or assets. These loans are very risky for the lender, but they aren’t as risky as no-doc mortgages.
Tips for Borrowers Considering a Stated Income Mortgage
A stated income mortgage can make homeownership more accessible for independent contractors. Here’s what you should do before getting started.
Assessing Your Financial Situation
It’s important to gauge your budget and the predictability of your income before taking out a mortgage. A common mistake is buying more home than you can afford or ending up with very little room for error. Living below your means can make homeownership more enjoyable and increase overall happiness.
Working with Lenders and Brokers
You shouldn’t rush to accept an offer from the first lender you find. Comparing rates and terms from multiple lenders and brokers can help you find the best deal.
Potential Red Flags to Avoid
While a stated income mortgage loan makes homeownership more accessible for self-employed workers, it’s essential to avoid some of the common red flags that can show up:
- Excessive interest rates
- Company with very few reviews or details
- Offers that seem too good to be true
- Buying a house that you can barely afford
Conclusion: Can You Still Get Stated Income Mortgage Loans?
You can still get a stated income mortgage loan, but you will have to provide financial documents that prove you earned the amount that you stated. These financial products offer a viable alternative for independent contractors who do not have W-2 forms and use several write-offs to make their taxable income smaller. If you are looking for alternatives to traditional loans, a stated income mortgage loan may be worth considering.
