Stated-income loans start a comeback
Banks in some parts of the country are offering stated-income loans again.
These mortgages were created to help small-business owners and self-employed professionals who can't document their income with W-2 forms, as most types of mortgages require.
Those loans virtually vanished after the housing bubble burst, because hundreds of thousands of borrowers and mortgage brokers had falsified applications with wildly inflated salaries to obtain stated-income mortgages that couldn't possibly be repaid.
As lenders tiptoe back into these kinds of loans, they're offering less-generous terms and examining applicants more closely than during the calamitous lending binge of the early 2000s.
"At the height of the real estate bubble, a self-employed borrower with two years of tax returns could qualify for a 30-year, fixed mortgage at a rate as low as 5.75%, with zero down, no income verification, no down payment and a subpar credit score," says Bob Hotter III, broker for real estate firm ClickAnnArbor.com in Ann Arbor, Mich.
"These days, lenders are looking for borrowers with great credit scores who can make a down payment of around 30%, and even then, you're looking at an interest rate of around 8.95% on a 30-year, fixed mortgage."
One of the lenders Hotter works with, First National Bank of America in Lansing, Mich., offers a five-year balloon mortgage at rates from 8.95% to 14.95%, depending on your credit score, with a 25% down payment (or 25% equity for a refinancing).
Mortgage brokers tell us that stated-income loans are still virtually impossible to find in California, where much of the abuse occurred.
But we found lenders on the East Coast offering stated-income loans, and with much better terms:
- Emigrant Savings Bank of New York is charging an initial rate of about 8% for a 3/1 adjustable-rate mortgage and 9% for a 30-year, fixed rate loan. Borrowers must have credit scores of 700 or above and 30% down payments for a purchase and 35% equity for a refinancing.
- Investors Savings Bank, based in Short Hills, N.J., is charging just a quarter-point above the interest rate for fully documented loans for borrowers with a minimum credit score of 700, a 40% down payment, four months of cash reserves and proof of assets.
- Hudson City Savings Bank, based in Paramus, N.J., is charging three-quarters of a point above the full-doc loan rate for borrowers with a well-established credit history and a down payment (or equity) of at least 40%.
There are several types of stated-income mortgages, based on how much, or how little, documentation the borrower must provide.
A stated-income/stated-asset loan, for example, requires borrowers to tell the lender how much they make and what assets they hold. But they don't have to divulge the source of their income or provide any proof of ownership.
A no-income/verified-asset mortgage doesn't even require borrowers to say how much they make. But they must fully document their holdings with brokerage statements, property deeds, business licenses and incorporation papers.
Taking a borrower's word for all of that made those loans a bigger risk and resulted in higher interest rates. Before the bubble, that was usually a quarter to half point more than the borrower would have paid for a fully documented loan.
But the extra cost was well worth it for borrowers whose financial lives didn't fit the traditional mold.
Problems arose during the real estate boom when lenders started pushing no-doc loans with consumer-pleasing features such as no down payments and big fees for mortgage brokers.
The number of applications for stated-income loans soared as brokers began signing up clients for no-doc loans even if they had regular jobs and could fully document their income with W-2 forms.
It allowed them to inflate their client's income, and that was the only way those clients could qualify for a loan that was big enough to buy the house they wanted.
When hundreds of thousands of these "liar loans" began to default in 2007, lenders discontinued their stated-income mortgage programs.
Self-employed borrowers forced to apply for fully documented mortgages found that many lenders wouldn't count any income they couldn't back up with a W-2.
Michael Byrne, a Hillsborough, N.J.-based mortgage banker and broker, says banks that would consider non-W-2 income have had strict requirements.
A small-business owner, for example, must have proof that his pizza shop or dry-cleaning store has been in business for at least two years and continues to operate. Account verification and full tax returns must be provided.
Expect lenders to verify that the tax returns you provided were the ones filed with the IRS by requiring you to sign an IRS Form 4506.
And finally, this is one of the few types of loans that's tough to shop for on the Internet. Rates and terms for stated-income loans are not available to compare on sites like ours and are often not provided on a bank's own Web site.
If you need a stated-income loan, you'll need a good mortgage broker to help you find it.
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