When applying for a mortgage, individuals who earn non-standard income through self-employment or investments may find that traditional loans are ill-suited for them. In such cases, stated income loans are great alternatives. Rather than risk rejection due to misrepresented income information, loan seekers can instead apply for a stated income loan.
What is a Stated Income Loan?
Most loans require individuals to provide appropriate documentation of their income, typically in the form of a W-2 form. However, when individuals earn a substantial amount of their income through non-traditional means (either by being self-employed or through investments in real estate, for instance), such requirements become difficult to supply. A stated income loan simply requires applicants to state their income, allowing for the inclusion of non-traditional modes of income.
In order to be approved for a loan, individuals should also be prepared to have other factors considered by banks or other loan providers, especially in the absence of income documentation. With stated income loans, credit score requirements are often higher, and lenders also tend to prefer to see individuals with a period of at least two years during which they earned a steady income. Because these loans can be considered riskier for lenders, such factors must be considered to determine how dependable an individual is when it comes to paying back the loan. An additional number that lenders consider is the debt-to-income ratio which will be used to determine how much an individual can borrow from any given lender.
Benefits of Stated Income Loans
In addition to making the loan application process simpler for individuals with alternative income streams, stated income loans are also beneficial in other ways. Unlike many other loans, these are available to individuals as well as larger entities such as corporations and trusts. Though stated income loans may require a larger down payment, they account for the true income of an individual beyond what is formally documented, allowing for a higher approval rate.
Stated income loans are great for individuals whose income stems from alternative sources. With more implicit flexibility in reporting income and a higher chance of approval than with traditional loans, stated income loans are best suited for those who are self-employed or who earn a substantial percentage of their income through investments.