Getting a mortgage while self-employed

You’ve been reading up on stated income mortgages, and the search results are not good.  Your search history might have included terms like “crash”, “recession”, and “bubble burst”…enough to make you want to distance yourself from this type of loan.  But I’d ask that you hold your horses and let me drop some knowledge on you.  You might be surprised to learn that today’s stated income loans aren’t what they used to be.

Hi friend.  My name is Phil, and I run A Nightmare on Loan Street Blog.  It’s a blog about loans and nightmares.  So trust me, I’m THE person to tell you about stated income loans.

If you read my blog post on stated income mortgages recently [link to it], you may have learned that these are loans that use alternative documentation to verify your income.  Sounds like a reasonable thing to do, right?  So why do these loans have so much baggage?  

Let’s jump back in time to the early 2000s.  Ahhhh.  Things were good.  Maybe you’re enjoying a Zima and just finished using your at-home frosted tips kit.  You turn on the news and WHOA!  All these guys are talking about is a financial crisis because the housing market blew up.  Well, this is where stated income loans got their bad reputation.  

You see in the early 2000s, lenders were handing out dough left and right.  Stated income loans were used wayyyyy too much, and everyone from salaried employees, to home flippers, to scammers, to people with bad credit were getting loans this way.  Some of these loans were even for more than the house was worth (up to 125% of the value).  There wasn’t much homework done to verify income from the people borrowing.  It was a recipe for disaster.  

Let’s get back today.  While we can say goodbye to frosted tips (hopefully forever), it might be a good idea to take a look at stated income mortgages again.  You see, there are some guidelines in place thanks to a thing called the Dodd Frank Act that required much more structure to lending.  Lenders now verify income using W2s and tax returns.

The downside to that structure is it shut the door on conventional loans for those that don’t have much income on their W2.  It’s a total bummer for the self-employed that maximize their legal deductions, re-invest their capital into the business, or simply haven’t been in business for very long (but are profitable).  Hopefully you can see that there’s still a need for stated income loans for a LOT of people.

Today’s stated income loans are much different than they used to be.  Lenders now look at a variety of things to verify whether or not borrowers are qualified.  Here are a few examples:

• Credit Score
• Bank Statements
• Business’ P&L
• Fantasy Football Draft Pick History

Ok, the fantasy football draft picks part is not true, but take my advice and stay away from kickers until the last couple of rounds. 

The bottom line is that lenders can avoid the risky loan behavior from back in the day and take appropriate steps to verify that borrowers will be able to pay back the loan.  So if you find yourself shut out by the big banks because of your tax return or W2, it might be time to consider a stated income mortgage.