Prior to the housing crisis, stated income loans were easy to obtain. As long as you had good credit, lenders believed the income you “stated” was accurate and funded the loan. Then the housing crisis occurred and stated income loans took a leave of absence. Today, they are slowly making a comeback, but not in the manner they once existed. Generally, only self-employed borrowers are privy to the no income verification loan product, but not every self-employed borrower – only those who meet specific requirements.
Great Credit is Important
The first step to a no income verification loan is to have great credit. This generally means a score over 700. Lenders do not focus solely on the score, though. They look at your credit history too. You must have an impeccable history within the last few years. This means no bankruptcies, foreclosures, collections, or even late payments. Lenders need to see that you are financially responsible and able to handle your debts without an issue.
Self-Employed Borrowers Typically Qualify
In most cases, it is self-employed borrowers who need the no income verification loan. These borrowers make money in “real life” but not on paper. They might not have the proper documentation to prove their income, especially if they don’t draw a salary from their company. When there is no W-2s or paystubs, the lender requires two years’ worth of tax returns. For a self-employed borrower, this could be a real problem. Many people who work for themselves take many deductions on their taxes. This is legal, but it lowers their adjusted gross income. Lenders can only use the amount of the adjusted gross income to qualify them for a loan. This is where the issues begin.
When a borrower does not have enough proof of their income, they cannot secure a fully documented loan. This is where the stated income loan helps. Today, lenders often call it the alternative documentation loan. This is because they are not taking your word for it regarding your income just because you have good credit. Instead, you have to provide other documentation to prove your income. Most commonly, this is your bank statements. To keep things as clean as possible, it helps when you have clearly separate accounts for your personal and business life.
What do Your Asset Statements Need to Show?
No two no income verification loans have the same specifications. Every lender has their own requirements. Some require a lot of reserves on hand in order to qualify. Others simply require that you make a very large down payment. Because these loans are “ portfolio loans” meaning the lender keeps them on their own books, they can make up their own rules. As a standing rule, most lenders require great credit, but beyond that, every lender differs. In fact, it might take you slightly longer to find a lender willing to provide you with a loan. Make sure you are prepared to shop around.
Ways to Enhance Your Chances of a No Income Verification Loan
Just being self-employed is not enough to guarantee you a no income verification loan. You should have your financial life in tip-top condition if possible. Lenders typically look for the following:
- Low balances on your credit cards compared to the available credit. A good number to target is 20%. If you carry a balance higher than 20% of your available balance, it could bring your credit score down and make you look riskier to potential lenders.
- Show regular deposits on your bank statements, either personal or business, depending on which you choose to use. You need to show a steady flow of income coming into your accounts. They don’t have to be the same every time, as a salary would be, but have enough consistency that the lender can believe in your income.
- If you have any business contracts that show your flow of income, provide them to your lender as they can show more proof of your consistent income.
- Your CPA can provide you with a letter stating that you are self-employed and that he can verify you make an income.
- Provide a current Profit and Loss Statement for the last 3-12 months if possible for further proof.
- The more reserves you have in a liquid account, the less risky you look to a lender. This means money beyond the funds you will use for the down payment. This money should sit in a liquid account and be able to be used for times when your business income falters and you cannot make your mortgage payment.
- Proof of experience in the industry your business operates in also helps. This could mean that you owned your own business for many years or you worked in the same industry as your business for many years before opening your own company. The experience shows that you have the chance to succeed.
A no income verification loan is not incredibly easy to find or obtain, but they are out there. If you have the qualifications, shop around with various lenders. You might not find an available loan program at the larger, commercial banks. The smaller, privately owned operations are typically the ones who have stated income loans available. They are becoming more popular today as more people open their own businesses. Whether due to downsizing, companies closing, or just the desire to do something for themselves, self-employment continues to be on the rise.
Before you apply for a stated income loan, make sure your affairs are in order. It really pays off to take the time to make things look as good as possible. If you have a few late payments on your credit report, don’t just make them current, wait until a good amount of time passes. This way you can show that you overcame those issues. This also goes for your income. Don’t apply for the stated loan when your income is at its worst or is inconsistent. Wait until you have a good cash flow going and can show the lender that you are a very low risk.