Who Benefits from a Stated Income Loan?

In a stated income loan the lender requires less documentation of the borrower's income to complete the application process and fund the loan. A stated income loan can offer benefits to the borrower and the lender. But there are pitfalls associated with a stated income loan as well. The following information will explain what a stated income loan is, who benefits from it and what to watch out for.

How Stated Income Loans Work


With a traditional mortgage loan, your lender will require documentation to verify your income. Typically, this is two years of IRS form W-2s you have received from employers.

But many people with incomes adequate to qualify for a loan do not receive W-2s. A self-employed person receives 1099s for their contract work, so their income can be reported. Retirees often receive only statements from investment accounts. A self employed person will then report their earnings in the form of a profit and loss to the IRS and "adjust" their income accordingly.

In a stated income loan, those not receiving typical documentation of income, such as W2s from an employer, can simply state their income to the lender. The borrower authorizes the lender to contact the IRS for verification of earnings.  However, the 4506t, or form that used for IRS verification of earnings, is not typically used for stated borrowers. An underwriter will only require the form to be processed if the income seems too high for the stated position, according to experience or position.

How You Benefit

Lenders qualify you for loans on three primary factors: your income compared to your debt, your credit score and the down payment you can provide. Often, a self-employed person generates considerable cash flow and enjoys a nice life style from a small business. Much of that person's "income" can be business expenses which end up reducing the bottom line of a tax filing. For this person, with good cash flow, the stated income loan can open up avenues of financing that might otherwise be difficult to access.

The same is true of retirees, investors and developers. For example, a developer might spend several years on a large project that pays a small fee while the project is under construction but has a large lump sum upon completion. Depending on the year the developer applied for a mortgage, there could be very little income to report. A stated income loan benefits such people with large swings in their income.

How the Lender Benefits

There is more risk for the lender with a stated income loan. The borrower could be lying about the stated amount of income, and it is more difficult to verify that. But the lender gets a higher interest rate for that increased risk. Additionally, the lender will demand a 20 to 30 percent down payment, which further secures the loan.

Pitfalls

There are pitfalls for the borrower and the lender with a stated income loan. If the borrower stretches the truth, he might be qualifying for a loan he will be unable to pay. If the borrower is completely truthful, particularly the self-employed, there is greater risk of income swings that can affect the ability to repay.

The lender faces increased risk with a stated income loan and must determine whether the borrower is being truthful and what lengths to go to to verify.

Getting the Benefit

A stated income loan is easiest to get in a strong economy and a rising housing market. With many qualified buyers, lenders are competing for business and are willing to take more risk. In a down market, the more documentation you have of your stated income the better your chance of benefiting from a stated income loan.