Are Stated Income Mortgages Gone for Good? Probably Not
By: Freeman Liz
May 21, 2010
Legislation passed by both the House of Representatives and the Senate goes a lot further in some ways than had been anticipated. And one of the changes that Congress wants is the abolition of certain mortgage products. Lenders will be prohibited from making mortgages that don't require the borrower to prove he or she can repay the loans.�� But in most cases, mainstream lenders did in fact make Alt-A loans (not to be confused with sub-prime mortgages to borrowers with bad credit) to borrowers who were capable of repaying the mortgages at the time the loans funded. They just had to determine borrowers' income using alternative methods. These methods could be used to "prove" borrowers' income once again and still satisfy Congress.
The Bank Statement Method
Some lenders allowed mortgage applicants to state a monthly income as long as it was supported by bank statements. If you said that you made $10,000 a month, and your checking account showed a monthly influx of roughly $10,000 a month, it was assumed that you did in fact make $10,000 a month.
The Asset Method
Other mortgage programs used your assets to estimate your income. Their underwriting requirement was that you had to have liquid investments of at least six times whatever monthly income you were claiming to earn. It seems reasonable that if you earn $10,000 a month and are well- established that you'd be able to save at least $60,000.
Other Considerations
Contrary to what some grandstanding politicians like to claim, few lenders just believed anyone who waltzed into their offices and said they earned $10,000 a month. Underwriters analyzed other data to interpolate income. For example, if you claimed to bring in $10,000 a month, it would seem a bit fantastic if you rented your apartment with two other people and only spent $400 a month. If your credit report showed limits of $300 on all of your credit cards, and balances carried month after month, you'd probably have some explaining to do. Ditto if your self-employment was a "work-from-home opportunity" like selling makeup. Underwriters often want your business license, articles of incorporation (if applicable) and/or a letter from your CPA or attorney. Stated income mortgages are generally only made to borrowers with exceptionally good credit scores. Finally,�� stated income or no income verification mortgages generally carry higher mortgage rates and require larger down payments or more home equity.
Why Is Alternative Income Verification Needed?
Many mortgage applicants, especially self-employed people, have more income available to make mortgage payments but it isn't counted under FHA or conforming mortgage underwriting guidelines. The cash flow is there but tax deductions reduce taxable income. For example, a home office is deductible but the fact that you use part of your house for business doesn't make it cost more. Normal business fluctuations can reduce the income that gets counted for loan approval. For example, if your income is $50,000 one year, then $100,000 the next, your income is averaged and you get to count $75,000. However, if your income is $100,000, then $50,000, you'll be lucky to get credit for $50,000.�� Income from self-employment or commissions is treated very conservatively. Sometimes two spouses both have income but one has bad credit and can't be on the loan. The bad credit spouse has income to contribute toward the house payment even if it can't be counted under standard underwriting.
It seems reasonable that lenders will find a way to verify borrowers' ability to repay their mortgages per the new guidelines even when taxable income doesn't accurately reflect cash flows.
