Stated income from a mortgage professional’s stand point – part 2

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

In an earlier post I spoke about my disdain for loan officers who substitute stated income loans for inflated income loans – truly making them "liar loans."

For some reason loan officers replace the word "stated" with "inflated" income. Stated income is not supposed to be inflated income – but all too often stated income loans are used by loan officers to qualify someone for a loan amount that they could not qualify for using full documentation.

At the end of the post I promised to come back and address when it is appropriate to use stated income loans for borrowers. So tonight, I’ll answer that question.

Invariably there are people out there that will disagree with my position and that is fine, I know some people who believe that stated income loans should be illegal, and frankly I couldn’t disagree more with them. Stated income loans have a legitimate place in the market and are great products when used properly (i.e. not as inflated income loans).

When stated income loans make sense:

When a borrower has hard to document income - imagine a borrower who is a hair dresser. They work in a primarily cash business which are typically hard to document in terms of income. The stylist is usually a 1099 independent contractor there and makes a large percentage of their income in cash; much of their take home will not show up in the cookie-cutter W2 and pay stub combination. They don’t qualify for fully documented loan.

Further they may use their self-employed status to write off a majority of expenses as business expenses, reducing their taxable income. Again it makes them unable to qualify. Just because they have a hard-to-document income doesn’t mean they should be denied financing; a stated income loan makes a lot of sense here – as long as its not…right!…an inflated income loan.

For the skeptics please note that I am not advocating qualifying a hair dresser who makes $40,000 a year for a $700,000 mortgage. I am talking about financing with out giving them a Blown Mortgage.

When the borrower is self-employed – For many of the same reasons as the independent contractor above, a business owner will most likely have many expenses written against their income to lower their tax basis. They may or may not receive W2’s; for instance if they own an S-Corporation they may just have Schedule K-1s. Their income statements will not qualify them for full documentation; or it may be extremely difficult and time consuming to ask an underwriter to go through business tax returns, P&L’s, etc. A stated income loan makes a lot of sense here, too.

When the borrower has multiple streams of income - If a borrower has income coming from stocks, a job, some consulting, book sales, real estate investments, etc. it may be too difficult to paint a coherent picture for an underwriter to piece together the income in order to qualify the borrower for full documentation loans. Multiple streams of income borrowers are great candidates for stated income loans.

When the borrower has great credit and wants the loan done fast – If a borrower has excellent credit they may qualify for full document loan pricing (which is better than stated income pricing due to reduced risk) even when they state their income. For example, Countrywide offers full document pricing for stated income loans through their Fast & Easy program. If a borrower qualifies for the same rate and program stated as they would full document, it makes a lot of sense to make the loan process less cumbersome by giving the borrower the same priced loan through a stated income program. This speeds the process, gives the borrower the same benefit, and makes a well-qualified borrower go through less hoops to secure financing.

So there, those are some of the times when a stated income loan makes a lot of sense. They are special cases and that is what the stated loan was made for. Greedy salespeople invented the inflated income loan to push through more deals – not the intended use of the stated loan.

What are some other times when stated income loans make sense?