Dear Reader…….I’d like to re-introduce you to stated income loans. There are a few very select lenders/investors again financing these types of loans and we are now able to offer them to buyers who cannot quality for conventional lending products. It’s a viable solution for the self employed or non traditional income borrower who may not be able to qualify solely on his/her tax return due to the write-offs or a myriad of other reasons.
However, early indications show that these loans are making a discernible positive impact for the people who need them and the real estate market as a whole. Credit availability was too loose in years past and since then it has been too tight, shutting many potential buyers out of the market.
If this comes as a surprise to you, we’re in the same boat. May people, myself included, wondered if this type of loan would ever find it’s way back to the market after what happened with the mortgage meltdown.
Yes, stated income loans were part of the problem during the 2006-2008 mortgage crisis. But it is important to differentiate that stated income is different than subprime and the stated income product we have now is quite different from the one in years past. Instead of driving the default rates up, these loans are actually helping people.
Let’s look at our stated income product and where it can make sense.
Who: Self Employed Borrowers that cannot qualify on their tax return (or taxable income) alone.
Who: People who for one reason or another do not have traditional or easily verifiable income.
How: With a 30% or more down payment and 680+ fico scores, this product becomes available. Applicant of course must meet other requirements, but for the most part they are any different than conventional loans (these other requirements).
The way “stated income” works is where the applicant lists on the initial application, the realistic amount of monthly income they bring home and as long as it is reasonable and makes sense when compared with the other components of the application and the documents to support it, the underwriter can sign off on it. For example, 20K per month for a restaurant manager probably wont fly, but 25K per month for a business owner that has been in business for 10+ years and has strong cash reserves probably will.
Basically we are talking about a “make sense” product and underwriting here.
Examples of Stated Income Loans we are currently working on:
What: The loan is fixed for 5 or 7 years and then adjustable annually thereafter. Rates start at 4.750% with 1.5% discount points (5.21% APR) and the payment is amortized over 30 years.
Example: Individual purchasing a new primary residence in Orange County for 1.1M. Putting $440K down the loan amount is $660k. They cannot qualify for conventional financing because they own a business and with all the deductions and write offs the 2 year average of net income yields a debt to income ratio that exceeds current thresholds. They have a 705 fico and will end up with 4.750% on a new mortgage. Principal and Interest here is $3,442.87 monthly.
Strategy: Often times we can use a product such as this to get a client in the home and then work to refinance into a lower interest rate or conventional loan in the near future. On this example, there is a good chance that this individual can qualify for a lower rate with a conventional program once their 2015 tax return is filed because it may very well show more income. Because there is no pre-payment penalty on the above scenario, we can refinance as soon as the client can qualify for a lower rate.