Words like “stated income” and phrases like “1 day after short sale” remind us of the Real Estate debacle which then led to an economic meltdown.
Instantly, careless, reckless and irresponsible flash across my radar. However, the carelessness present in mortgage products pre-melt down is absent from today’s
Stated Income Home Loans – Then vs. Now
Old school stated income loans were doomed right from the start. Home-buyers aimlessly and unreasonably stated their incomes. Even salaried and hourly wage earners had access to stated income loan products. Yep – stated income loans applied to workers that had fully document-able income as well. To make matters worse, the stated income itself did not go through an “accuracy” test.
Then – Stated Income Mortgage
Mortgage lenders accepted a loan applicant’s stated income at face value. Then, they used it to qualify the borrower for a home loan. In addition, many stated income borrowers put zero down on their new home. Lenders did not verify the net worth of a stated income borrower. Credit score requirements were often virtually non-existent. Essentially, what we just described is an economic and financial nightmare.
Now – Stated Income Mortgage
Today, a stated income loan still allows buyers to “state” their income. However, now stated income loans are only for the self employed. The modern stated income borrower follows a much different path on their way to mortgage approval. For example, requirements include:
- Provide business bank statements
- Lender analysis deposits and expenses to test income’s relationship to cash flow
- 30% minimum down payment
- Credit score requirements are high
- Overall net worth is reviewed
Sensible Mortgage Lending in the Gray Area’s
Mortgage Lending cannot be black and white and still serve all home-buyers. However, post melt down black and white describes mortgage lending perfectly. Federal Regulators birthed complicated legislation into the home loan industry. Lenders reacted timidly. They did not want to offer much more than standard lending products. While conforming lending products serve the majority, there is a segment they do not.
Today, lenders have stepped into the gray. Stated income loans are proof of that. However, reduced doc home loans are structured responsibly today.
By Jeremy House