Stated Income Mortgages are available in 2018 and are now referred to as alternative mortgages or Non QM mortgages. This means the income is stated on the loan application and verified by other means than the traditional methods. The traditional methods underwriters use to document income include pay stubs, tax returns, W2’s and 1099’s.
Bank Statement Loans
The most common type of stated income or alternative loans are bank statement loans. With these types of mortgages, the income stated on the loan application is verified by bank deposits. If you are self employed and deposit money in the bank, you can use these deposits to verify and qualify your income. This type of loan is used most often because a person is self employed, earns money, deposits money into the bank, and files tax returns. However, they cannot qualify for a traditional mortgage because when they file tax returns they maximize expenses and show no or very little adjusted gross income resulting in not enough income to qualify for a mortgage. These loans require good credit and at least a 10% down payment which must be verified.
Assets as Income
Another type of stated or “alternative mortgage” available today is “Assets as Income” mortgages also know as “Asset Depletion”. These mortgages are designed for people who have a large sum of money, but little to no documentable income. The first sub type of these are backed by Fannie Mae which allows this income to be used in conjunction with traditional documentable income. The most common example is someone who receives monthly social security income as their only source of income and also have a sizeable amount of money in a retirement account. Under normal circumstances, one would only be able to use social security income to qualify, but with assets as income he/she is allowed to use “assets” as an alternative additional amount of income. For example if someone has $2,000 per month of social security income and $400,000 in the bank, the $400,000 would be counted as $1,476 monthly income. The total of $3,476 would be used to qualify for the mortgage. This can be combined with any traditional source of income documentation such as W2’s, pay stubs and tax returns. So the $1,476 could be combined with wages from a part time job. An additional type of “Assets as Income” mortgage only uses a calculation of assets as income but cannot be combined with the traditional sources of income. The calculation is more liberal. Using the same $400,000 example as above, the imputed income would be $2,222 per month. Both types of these loans only use the money left after the down payment, so if someone has $400,000 in assets but is putting $50,000 as a down payment, then only the $350,000 can be used for the calculation. The assets that are allowed to be used on this program are checking, savings, CD’s, stocks, bonds, brokerage, IRA, Keogh, retirement accounts, proceeds from a loan taken prior to closing, cash value of life insurance policy, funds from a business account, and distribution from trust.
Rent as Income
Besides bank statements and asset depletion, there are loans that allow for rent on a property to be used as income to offset the proposed mortgage payment. One such loan is called a Debt Service Coverage Ratio Loans (DSCR). With this type of loan the proposed rent on a property must cover the mortgage payment in certain ratios. Usually these programs have guidelines of 1:1 or rent must cover the mortgage (with taxes, insurance and all escrows), so if the mortgage payment is $1,000 per month then the rent must be $1,100 per month or more. That is a simplified way to explain the program. There is also a vacancy factor added to the rental income. The proposed rental income will be determined by an appraiser doing an appraisal on the property. The appraiser will come up with the rental amount based upon “market rent” which means looking at the monthly rents for similar properties in the market. These types of loans require good credit and typically at least 25% down. The other category of this type of loan is a conventional loan for an investment or non owner occupied property. The appraisal will determine what the market rent is and this amount can be used to offset the payment. For example if the proposed mortgage is $1,000 per month and the market rent is $1,800 per month, the mortgage payment will be offset but the extra $800 cannot be used as additional income to the loan application. So a borrower would still have to show income to support other debts such as the mortgage on his primary residence and all other debts.
The last type of stated income, alternative loans offered today are lumped together as “Business Purpose”, “Outside Dodd Frank” and “Hard Money” loans. These loans can have no income verification and are primarily based upon the equity in the property and sometimes have no credit requirements. They are offered by institutions and individual investors. They all have slightly different variations and guidelines, however the common theme is that they require a larger down payment and higher interest rates. The Business Purpose loan is when someone purchase a property with the intent to use the property for business. Therefore the loan is not subject to “consumer” regulations. This can include buying a residential single family residence for business purposes. Often times the person buying this type of property sets up an LLC to purchase the property. These loans require larger down payment and have higher interest rates. Similar to this are “Outside Dodd Frank” loans which are mortgage loans that require a larger down payment such as 30% or more but allow for lower credit scores. They are based on the Dodd Frank Act which enacted strict rules on a lender documenting a borrower’s ability to repay a mortgage loan. Lastly, there are hard money loans which are primarily made based upon the equity in the property. The true hard equity loan generally requires a 35% to 40% down payment or equity position. These types of loan are designed for short terms such as 12 months. The market interest rates on these loans are amongst the highest and also have higher upfront fees.