What Are Stated Income Home Equity Loans and How Does One Qualify?
The application for a stated income loan requires a consumer to state earned income. Although the income does not need to be verified, the bank may deem it necessary to verify employment. Those who are self-employed may be able to use a business license to show they have work. Do not try to over-inflate your income. It must be a reasonable income for your field.
Although the need to prove income is negligible on a stated income home loan, there are some stringent requirements on the application. Since income verification is lax on these applications, credit scores generally need to be pretty high. Ideally one’s credit score should be no lower than 680. The best rates on a loan will typically be given to those with a score of 720 or higher.
Even though these low-documentation loans do not require W-2s, a bank will still need some indication that a consumer is financially solvent. Given the recent credit crunch and bank failures, requirements have gotten stricter. Banks typically require a consumer to furnish one of several financial documents. These documents usually need to cover the last two years. Some options include bank statements, records of bookkeeping, or reports of profit and loss. Most lending institutions will also ask for tax returns for the last two years.
Besides showing income through financial records, a stated income home loan application involves showing other assets. A consumer must also share debts with the lending institution. This is because the lender needs to examine a consumer’s debt-to-income ratio before deciding whether the person qualifies for a loan.
There are several types of stated income home equity loans besides the traditional low-documentation loan. Two of these are “no ratio” loans and “no income no asset (NINA)” loans. With a no ratio loan, consumers must provide a list to prove assets. These items would be bank statements showing the balance on each account, evidence of stocks and bonds, deed or proof of value on real estate, and any proof of ownership in a business or businesses. Although banks ask for proof that one has money to pay the loan off, they do not consider the debt to income ratio.
A no income no asset loan may become a thing of the past with the number of people defaulting on their loans. However, it is still used at the moment. People can get these loans with a top credit score and history. The bank will also require property appraisal.
Recently, some lenders have required Internal Revenue Service (IRS) forms be completed. The form used for this is form 4506. This document gives the lender the right to check tax returns for the last two years. Many do not act on this unless the borrower defaults on the loan. Often if a loan is defaulted on, the lender is checking to make sure the stated income was not fraudulent.
Stated income home equity loans allow lenders a bit of flexibility in deciding who is eligible for a home equity loan. They also help a person who is self-employed or who works on commission qualify for a loan. Stated income loans are usually low documentation or low-doc loans. Occasionally, these loans can be approved as no-doc loans. Regardless of the type of loan based on a stated income, a consumer’s credit score and report must be in tip-top shape.