A Detailed Statement about Stated Income Home Loans
Traditionally, someone applying for a home loan must show that his or her income falls well above the amount of money that he or she has owing to any person or organization. The owner of a business often fails to meet that requirement, because he or she has invested so heavily in that business. Still, that business owner could have a good, steady income. Therefore, brokers designed a way for such a person to simply state his or her income in a loan application.
Now some have called these stated income loans “liar loans,” because they see them as making it easy for an applicant to lie on a loan application. However, lenders do not just take for granted every statement by every applicant. They look at the type of job the applicant has, and compare that with the income amount stated on the application form.
Careful lenders have a full set of requirements that the applicant must meet. In most cases, the applicant must have a credit score of about 620. The applicant must be at least three years away from discharging any former foreclosure or bankruptcy. The person who is requesting the loan must have worked at least two years for the employer who is providing the stated income.
The person who is applying for the loan must prove that he or she has at least two months of a “bottom line” payment, an amount called PITI. In addition to those resources, the applicant must have enough money to cover 5% of the minimum down payment. The person who manages to meet all of those requirements can get a stated income loan for a single-family dwelling, a low-rise condominium, a townhouse, a vacation home or, in some cases, a manufactured house.
Now it might seem easy to apply for such a loan, but it can be tricky. Some lenders do not make clear to applicants the amount of money that they will have to pay, in order to cover the closing costs on the loan. Lenders have various ways for arriving at the total amount charged for such closing costs.
Some lenders do not ask the applicant to cover the cost of the origination fee. Some lenders are willing to pay the cost of the application fee. If an applicant does not seek a lock in fee for a period that exceeds 60 days, then that too often is paid by the lender. However, in most cases the applicant does need to pay for use of the lender’s office, for tax services, for appraisal of the home and for verification of the credit profile.
Still, that does not constitute the sum total of the closing costs. The applicant must pay the costs that relate to settlement on the loan. That includes the attorney fee, the search used to verify the chain of the title and the title insurance. In addition, the applicant is expected to cover the government fees and taxes.
A wise buyer asks for a Good Faith Estimate of the closing costs on a stated income loan before going forward with the application process. Once that process is in place, then the wise buyer gives careful thought to the need of, or ability to dispense with the lower interest rate that follows agreement to a prepayment penalty fee.
Brokers use the prepayment penalty fee as a way of discouraging homeowners from looking for a mortgage with a lower interest rate. This penalty fee normally disappears, once a mortgage holder has remained in a home for at least five years. In the past, few homeowners cared about refinancing their home, and were happy to accept a loan with a prepayment penalty fee. However, every homeowner is different.
Therefore, if you decide to get a stated income home loan then you need to think twice about whether you want that lower interest rate, or whether you are willing to pay the higher rate, and thus feel “free” to look for a mortgage with a lower interest rate.