Stated Income and No Doc loans

A stated income or no doc (no documentation) loan was initially designed for people who are self-employed and have difficulty documenting their income.

Lenders love borrowers who are employees who can show paycheck stubs and W-2s. If you are self-employed, own a business or your income is commission-based, traditionally lenders have been less enthusiastic.

Why is this so? Well, lenders are interesting in mainly 3 things – the borrowers’ income, employment and assets. If the borrower can document those items and the lender can verify them through W-2s, paycheck stub, tax returns, call to employer and bank statements, then all is well. This is considered a full documentation loan which is the standard for most borrowers.

If you are unable to or do not wish to document either income, employment or assets, then a stated income or no doc loan is the way to go. And you are in luck because in recent years, lenders have relaxed their requirements and it is now easier to find these alternative loan programs.

Actually, there are now so many variations of the stated income and no doc loans that it is probably impossible for us to cover them all.

Here are the major variations for stated income loans:

1) Stated Income, Verified Assets (SIVA) – income is stated only, assets are stated and verified

2) Stated Income, Stated Assets (SISA) – income and assets are stated only and not verified

3) No Ratio – we have heard of two types of no ratio: one with income and assets stated and verified, and the other with no income stated or verified.

If assets are verified, the borrower must generally meet a requirement such as 6 months of the stated income and 3 months of the monthly total housing expense. The buyer will often need to have the cash in checking, savings, 401K, IRAs, CDs or money market accounts.

Lenders will also require proof of employment, generally at least 2 years in the same field or 2 years of self-employment history. You can satisfy this requirement by getting a letter from your CPA or showing two years of a business license.

Then we have the No Doc loans and there are variations of those as well:

1) No Income, No Assets (NINA) – no income or asset information is stated or verified. Loan approval is based on credit score and down payment. Some lenders do require proof of employment while some do not.

2) No Income, No Employment, No Assets – this is considered a “true no doc” where no income, employment or asset information is stated or verified.

For all the above types of loans, the borrower will need to have good FICO scores, generally with a minimum 640 to 660. The higher the credit score, the better the rates.

As you can imagine, lenders are taking a bigger risk when providing these types of loans.

To offset their risk, they generally require higher down payment, higher credit scores and they charge the borrower more for the loan (higher interest rates).

The more information (income, employment, assets) the borrower can provide and verify, the less the cost of the loan will be.

One thing to be aware of is that at closing, the lender could require the borrower to sign a paper authorizing them to obtain your last two years’ tax returns from the IRS.

It is said that most lenders checks about 10% of all loans as part of their “quality control” process.

The borrower could be in trouble if there is a large discrepancy between the income stated on the loan application and that stated on the tax returns.

So, while a stated income or a no doc loan may open the door for some borrowers, it is important to note that loan fraud is a serious matter and something that the borrower should be aware of.

If you are interested in these types of loans, you can search online for lenders that offer them. Be very specific about what information you can provide and have verified. Not all lenders will offer the specific type of loan that you are looking for so persevere and call several.

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Word of Caution: The information stated on this website is for general information purposes only. The subject of taxation is complicated and should be discussed with your legal tax counsel. We are not tax experts nor do we claim to be. The tax laws change frequently and must be referred to prior to entering into any sales contract. Please consult with your tax specialist before entering into any binding sales contract.