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Stated Income Mortgages for the Self-Employed

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If you are self-employed and looking for a mortgage, don’t get discouraged.  There’s hope thanks to something called a stated income mortgage.  A stated income mortgage uses alternative income verification - a helpful option if W2s or tax returns don’t tell your financial story.  

Stated income mortgages have gotten a bad rep over the last decade.  That’s because back in the day, these loans required very little income verification.  Lenders did not ask borrowers many questions, and loan amounts exceeded the value of the home at times.  Can you imagine if this was the case to land a job?  

Employer: Can you tell me a bit about your work experience?

Candidate: I’ve had a lot of jobs and done really well at them.

Employer: You’re hired!

Using this analogy, you can see why this might have been a problem with loans.  This lending practice required some revisions after the 2008 housing market collapse.  The Dodd-Frank Act of 2009 put some additional structure in place when it came to requirements needed for mortgages.  

There’s basically two camps now: QM (or qualifying mortgage) and non-QM (non-qualifying mortgages).  Each have their own distinct purpose, and each uses different data and documentation to verify income.  

To keep things simple, QMs are your “conventional” mortgages.  You’d hit up a big bank for one of these.  Someone named Tammy or Roger will ask for documents like W2s, tax returns, and pay stubs to verify your income.  

Non-QMs are a little different.  Stated income mortgages fall into this category.  Non-QMs use alternative income verification methods such as bank statements (typically 12-24 months), credit scores, debt to income ratios, and the amount of your down payment.  

If you are self-employed, and you’ve already tried working with Tammy or Roger at the big banks, it might be time to consider a lender who offers stated income mortgages.  Stated income mortgages are solid options for entrepreneurs, self-employed, small business owners, or anyone who gets paid irregularly.  By “irregularly”, I mean: seasonally, in lump sums, or anything that doesn’t happen at regular intervals (like the 1st and the 15th of every month).

So how does it work with a stated income mortgage?  The lender is going to work with you using documents and data you already have.  You can expect them to ask for:

  • Bank statements (12-24 months)
  • Credit score (some lenders will work with scores in the 500s, but the higher the better)
  • Down payment (10-20%)
  • Debt to income ratio (read this blog post [link to post #14] to learn more about this)

This information helps a lender understand your ability to repay the loan.  This type of loan offers more flexibility when it comes to documentation for income verification, but it also carries more risk for the lender.  It’s important to know that interest rates may be 0.5% to 1.0% higher than conventional mortgages.

Is a stated income mortgage right for you?  It’s tough for me to have that answer pre-written in this blog post.  I don’t really know you.  But if you think it might be, I’d recommend talking to a mortgage advisor at a place like Truss Financial Group.  This is a mortgage broker that offers stated income mortgages, and they will work to find something right for you.  Tell them Phil said hi.

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