Most people when they think of investing in real estate, they always begin with filling out massive paperwork and going through piles of documents to make an ideal case for getting the loan, or even a mortgage. Today, when we look back, it is difficult to imagine that there indeed was a time when people could get a mortgage without having to show any real income proof.
Up until 2007-09—which introduced us to financial crises—, that was the case. Several borrowers depended on stated income loans—also known as income statement loans—which are ideally property loans and given without any income proof.
Before the law became stricter, these mortgages were thoroughly leveraged by lenders and borrowers alike. In some scenarios, it was also observed that some investors were talked into these loans even when they had no requirement.
Today, it is illegal to obtain a loan without any income proof. Of course, we have hard money loans, but then again you need to keep a collateral property there until you repay your loan to the lender.
Stated Income Loan: What is it?
Several years back, a stated income loan was introduced. This loan facility was unique, it did not require borrowers to absolutely no proof of their income apart from the applicant submitting a standard form mentioning their income. There were no checks performed on the same. When this facility rolled out, it is extremely popular with the self-employed people and people who did multiple jobs and found it difficult to show one source of income.
As these loans started gaining recognition, it reached to people who never had any means to repay the loan, that is when all hell broke loose. Income stated loans garnered too much attention and began to be known as ‘liar loans’.
The biggest problem in this loan system was the miscalculation of the borrower to understand or inflate their income for repayment. This would eventually lead to massive debt and a growing interest rate. Therefore, when it came to financial crises, asset mortgages played a bigger role. These loans led to people being in enormous debts that they could never afford to repay.
Eventually, people defaulted and the ripple effect of this led to financial crises.
Stated Income Loan: Can we get this loan today?
The age-old method of borrowing funds without income proof is long gone. Today, getting a loan from a bank or any other financial institute requires you to submit documents supporting the fact that you are eligible for a loan. Documents that include credit history, assets, debt history, ongoing loans, and employment proof. People who are self-employed have to start right from the basics by submitting their tax returns (for the last two years) and proof of their regular cash flow.
However, there are loans similar to stated income loans, which will definitely require you to submit the necessary documents, but the amount of documentation will vary for every loan. Many professional lenders will work on a business or personal bank statement instead of looking at your tax returns. This option is preferred by self-employed people because usually, they don’t have their tax returns in place.
These loans are usually known as the alternate loans, bank statement loan, or alternate income verification loan. Yes, here too you have to provide your bank statements. However, not all of your documents will be verified by the lender. As compared to traditional bank loans, these loans are easier to get.
Lenders who work with providing such loans are known as ‘non-QM’ or non-qualified mortgage lenders. Being labeled as non-qualified loans does not pay this mortgage a bad option, but these loans can never be given or sold to Freddie Mac or Fannie Mae.
Similar to most loans, look around. Even when it comes to bank loans, take the opinion from at least three lenders to understand the deal you are getting. Lenders will provide you with accurate loan estimate documents within a couple of working days once they receive your application. The document will highlight the fees and costs that will be associated with your loan, along with interest rate, closing amount, and monthly payout.
Stated Income Loans for Real Estate Investors
Stated income loans have been quite popular with real estate investors as well. The income documentation law is simple, it is only applicable to mortgages for properties that are owner-occupied. Meaning, real estate investors can take mortgages for their investment properties without providing any documentation for their income. Moreover, a few lenders may also underwrite mortgages depending on the expected income generated from the property.
Stated Loans: Alternate underwriting standards
Even though you are a real estate investor, authentic lenders will only consider your existing income to the quality you fit for the loan. When issuing traditional mortgages, the expected income from rental will not be considered. Depending on these qualification rules, sometimes real estate investors struggle to get a loan.
However, today not many investors are stringent about submitting income documents. The law ‘ability to repay’ is not applicable to investors. Therefore, many lenders have started issuing investment loans on the estimated property returns. These loans are known as cash flow loans because lenders always underwrite the loan depending on the estimated cash flow.
Finding cash flow loans for investors
The moment the lender gets a rough idea of how much your property will make in the future, they will issue a cash flow loan. Ideally, they try to find out if the rent will exceed the expected property debt, and they will gladly issue the loan. However, every cash flow mortgage for the investors will be for 30-years, but often they come with adjustable rates.
When issuing cash flows, lenders will not consider the expected property value changes. Lenders need an assurance that they would be able to make money from rents, so these loans are considered best for holding or buying investors.
Many lenders will create a cash flow trajectory without any considering any inputs from the borrower. Although they will do thorough market research for factoring the stability and value in the rental market. Above cash flow, lenders will also consider the down payment size that is attached to the rental property, investor credit history, the kind of property they are buying.
To begin with, investors will have to invest a minimum of 25 percent on the property, but lenders may ask for a higher down payment. Also, investor loans come with higher interest rates as compared to the rates of traditional mortgages. Currently, the lowest rate on investor loan is 6 percent, but it can tend to go higher.
Even if you have to offer a heftier down payment, the challenge is finding the lenders willing to issue a cash flow. Also, before you opt for this loan remember that cash flow loans are often available to professional property managers or someone who comes with an extensive history in real estate. Before you freeze on one lender, ensure that you have spoken to a few of them before you make your decision.
Stated Income Loans: Will it work for you?
Stated income loans may be a convenient option of the past, but new underwriting innovations do exist, which offer a breather to people who want to opt for this loan. Underwriting loans bring in a higher interest rate, but for people in need, these loans do make a lot of sense. Upon careful research, you can find a loan that fits your requirement and also offers certain protection laws as other loan systems.
Before you seal the deal, do your own income calculation and have a realistic idea of this loan system will work for you and whether you will be able to pay it back on time. Because honestly, no one wants to be stuck with higher interest rates.