A History of the Stated Income Mortgage

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If a person gets paid with w-2, can that person still qualify for a stated program?


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Like so many other questions that get asked, the answer to this one is “it depends.” To help illuminate the subject, a little bit of history is in order.

Stated income loans were originally developed to satisfy the borrowing needs of the self-employed and people with income that is difficult to document. Basically, the companies who first offered these loans recognized and accepted the fact that, for someone who is self-employed, what shows up as adjusted gross income on a tax return does not necessarily reflect that person’s true income and is not necessarily indicative of that person’s ability to repay a loan. After all, isn’t it the accountant’s job to legitimately get their client every deduction possible?

So, when lenders started to offer these loans, they limited their availability to the self-employed, a category which usually included not only business-owners, but also people who earned cash income, e.g., waiters, cab-drivers, hairstylists, etc. They also required excellent credit — scores of 700 and up in most cases — and hefty down payments, usually 20% or more. They also imposed strict underwriting guidelines. For example, the applicant’s proposed monthly housing payment could not exceed 125 to 150% of their current housing payment — “Why should we believe that you can afford a $2,000 mortgage payment when you’ve only been paying $750 a month in rent for the last two years?” Applicants also had to show significant “reserves” in their bank accounts — “How can you expect us to believe that you are making $100,000 a year when you only pay $750 a month in rent, have three credit cards with limits of only $1,000 each and only have $4,000 in savings?” In short, underwriters were required to go over an application with a fine-toothed comb to make sure that everything made sense. To top it all off, just in case a few mortgages made on the basis of “stated income” went into default, lenders charged higher interest rates to compensate for the increased risk.

For reasons that would take too much space to adequately explain here, lenders started to loosen up their requirements for stated income loans. At one point in the not too distant past, some lenders offered stated income loans with no down payment to W-2-ed individuals with 620 credit scores. As the market has since learned, it wasn’t a very good idea. After all, if subprime lenders allowed W-2 earners to have debt-to-income ratios of up to 50% for loans with full income documentation, why on earth would a lender give someone who could provide proof of income the opportunity to “state” and not verify their income? (For those who don’t get it, the only reason is: to give that person the opportunity to state that they make more than they really do.) It doesn’t take someone with an MBA and a fancy computer analysis model to figure out that making that loan is a recipe for disaster.

Now that dozens of lenders who made shaky loans have gone out of business, most of the lenders who still offer stated income loans have learned their lesson and only make them to those individuals for whom they were initially designed:
people who don’t get W-2’s. It only makes good sense. Some still offer stated programs to W-2 employees, but on much more stringent terms than they did a year or two ago.

Answered about 6 years ago

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