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Stated Income Loans: Five Things You Need To Know Peter G. Miller - Mortgage Lenders Plus.com Add to Delicious, diggit, reddit, technorati favs

If you're a borrower in good standing then the odds are overwhelming that you can get a mortgage without a lengthy look at how much you make. In fact, most lenders will simply take your word for whatever income you say you have.

A large percentage of all mortgages are now made with "stated-income" loan applications, applications which require less paperwork and speed the lending process. According to a study of borrowing in the third-quarter of 2006 by Standard & Poors, 69 percent of all "Alt-A" loan applications -- the applications from folks who don't need subprime loans -- used "stated income" paperwork. These applications generally required no written verifications for income and no tax returns.

Lenders, however, do not make such loan applications to everyone. You have to be a strong borrower.

S&P found that the model Alt-A borrower had a credit score of 707 and that a typical loan had a 75 percent loan-to-value ratio (LTV). In other words, most borrowers were refinancing with substantial equity in the property or were buying with solid down payments.

Lenders welcome stated-income loans because of the high credit scores they typically require as well as the borrower's strong equity in the property. Stated income loans are especially helpful for self-employed borrowers, individuals without pay-stubs or W-2 statements that can be easily checked.

While stated-income loan applications make the lending process quicker and easier, there's a lot of misinformation regarding such forms and the result is that some borrowers miss the opportunity to use stated-income loan applications while other borrowers might be better served with other types of applications.

As a borrower you want to know what type of stated income application you're getting -- there are different types and the difference can be important to individual borrowers. Also, you want to know about such things as speed, possible cost, the need for accuracy and tax records. With a better understanding of how the system works borrowers can make better choices.

Is a stated-income loan application for you? Here are five basic issues to consider:

1. Not all "stated income" loan applications are alike.

The term "stated-income" is used generally, as is a similar expression, the "no doc" loan. However, there are different loan application formats with different requirements.

For instance, with a "stated income/verified assets (SIVA)" loan application the lender will not ask for pay stubs or tax returns. However, the lender will likely want bank statements. Why? Common sense. If you claim $100,000 in annual income then checking and savings accounts should show a related level of cashflow.

A "no ratio" loan application means there need not be an income claim -- you can leave it blank. However, the lender is likely to check other matters, such as employment.

A "stated income/stated assets (SISA)" loan application does not require a check of either income or assets. If you're looking for a "no doc" loan, this is it.

2. Stated-income loans may cost more

Although stated-income loan applications often involve transactions where borrowers have solid down payments, substantial credit and significant equity, loans without verifications are still risky -- more risky to most lenders than boring, old-fashioned loan applications where borrowers must provide full documentation.

Because they represent more risk, lenders usually -- but not always -- charge something extra for loans with no doc applications. How much more? That depends on such factors as the loan program, the amount down and the borrower's credit rating.

Let's say that when using a no income-no asset loan application the lender requires an extra .375 percent interest -- the actual figure could be higher or lower. Let's also say that financing with full docs is available at 6.25 percent while the no-doc borrower will pay 6.625 percent (or 6 5/8ths). With a $150,000 loan over 30 years, these loans will have monthly costs for principal and interest of $923.58 and $960.47 respectfully. In this example, the no docs option costs an additional $36.89 more per month -- that's almost $450 extra in the first year.

A recent study by Campbell Communications for Inside Mortgage Finance surveyed 2,140 mortgage brokers and found that a large number of no-doc borrowers -- 39 percent -- are salaried wage earners. Since their income is easy to establish with W-2 forms and payroll stubs, these borrowers might consider full-doc applications and possibly-lower mortgage rates.

3. Stated-income claims may be checked.

A stated-income loan application is not a free-pass for financial fantasies. While it's true that most stated-income/stated asset loans are not individually reviewed, some are.

Mortgage loans are routinely sold, often in "packages" with thousands of other loans. To assure they're getting good loans, investors who buy such packages will pick out individual applications at random to check for accuracy. How are applications audited? By comparing claimed income with tax returns. How can lenders get such information? Because part of the lending process requires borrowers to complete IRS Form 4506-T, a document which allows lenders to obtain past tax returns.

In addition to random audits, when a home is foreclosed borrowers can expect that lenders will go back and carefully review original loan applications.

No matter what type of loan application you use -- whether full-docs, no docs or something in between -- make a point of building a file which can support all income, debt and asset claims. If the lender does not require such documentation, that's fine -- but keep the file in a safe place in case such questions arise.

4. You need current and proper tax records

Lenders will not knowingly advance money to anyone who has failed to file tax returns or claims income they have not reported. The reason? When a property is financed the loan is secured by the property. A lender typically has a first or second lien -- if the property is sold at foreclosure the entire first loan must be repaid before any money is used to repay the second loan. However, tax liens must be paid before mortgage liens when a property is sold or foreclosed so lenders want to make certain that borrowers have paid their taxes in full.

If you have tax returns which need to be amended or filed, speak with a tax professional before seeking a mortgage.

5. A stated-income loan application will save you time. But do you need to save such time?

It's true that no doc loans are quicker and easier to process for the obvious reason that there's less to verify. That means reduced paperwork and fewer headaches for the lender.

But consider this idea: How will you benefit from quicker processing? Neither buyers nor sellers are likely to want a settlement next week. Buyers want time to pack, move and often to sell the current residence. Sellers want time to pack, move and often to find a replacement property. Quicker processing is sometimes not a practical advantage, a factor to consider when deciding what type of loan application to use.