The stated income loan received a bad reputation after the housing crisis. In fact, there was a long period of time where no lenders offered this program at all. Now that things have settled down and lenders figured out the best way to handle certain situations, the stated income purchase and stated income refinance loan are back in action. The big question is, should you take one?
What is a Stated Income Refinance?
Today, a stated income refinance means something different than it did in the past. If you think back 10 or so years, the stated income loan meant you probably did not provide any type of proof of your income. You literally stated your income and that was good enough. Of course, you had to have the credit to back it up, but that was about it.
Fast forward to today and things are different with the stated loan. Yes, you can still “state” your income, but you have to prove it in alternate ways. You do not have to provide paystubs and W-2s or even tax returns, but you will have to provide something. Typically, it means providing your bank statements. This is just an alternate way of proving your income and it is beneficial for people that work for themselves or receive irregular income.
How to Prove your Income
First, you have to understand that the stated income refinance loan comes from a non-conventional lender. It has to be a bank that keeps the loans on their own portfolio. Conventional loans must abide by the Qualified Mortgage Rules which clearly state that income must be fully verified. This means paystubs and W-2s or tax returns. Because of this, you will have to shop with smaller or more obscure lenders, but this is not a bad thing.
Every lender has their own requirements regarding how to prove the income in an alternate fashion. The most common way is to provide the last 12 months’ worth of bank statements. This lets the lender see the average income you make over the course of the year. It also lets the lender see that you receive the income regularly and that you do receive the amount you stated.
In many cases, you will still have to provide an executed IRS Form 4506-T. This gives the lender access to your tax transcript. This is usually just to verify that you did, in fact, file your taxes. The lender will not be as concerned about the amount of income you claimed as it is obvious the numbers will differ, which is why you chose the stated income loan.
The Downside of the Stated Loan
As with any loan program, there are ups and downs to the stated income loan. The largest downside is in terms of the interest rate. You will likely pay a higher rate than you would on a fully documented loan. The term “higher” is relative, however. There is a reason you wish to refinance. Is it because your current interest rate is rather high? If so, you might find that you can obtain a lower rate even with a stated loan today. This is where the decision making comes into play for you. It is time to decide whether refinancing is worth it for you since you will have to pay a higher rate and possibly higher fees.
The best way to determine if you should opt for a stated income refinance loan is to determine how long you plan to stay in the home. Are you moving in the near future or is this a long-term home for you? This will help you determine the right choice. If you know you will move in the next five years or so, refinancing now with a higher interest rate might not be the right decision. You will not gain a large amount of equity in your home in that five years, so there will not be a large return on your investment.
On the other hand, if you do plan on staying in the home and you need to take cash out or you know your payment will decrease even with the stated income interest rate, then it might be worth it. Calculate how long it will take you to recoup the amount it costs to refinance, including any discount points, origination fees, and closing fees. The amount you save each month will add up to the closing costs in a certain number of months. How many months will it take you? Once you know that answer, you will know if a stated income refinance makes sense for you.