Stated income loans are made to borrowers who cannot provide pay stubs or tax returns that prove their income. These loans are making a comeback as companies like Westport Mortgage and Unity West Lending attempt to drum up new business by chasing customers that have been largely ignored.
“Lenders say these aren’t the same products as the so-called ‘liar loans’ that were pervasive before the housing bust,” Reuters writes. “Instead, the loans are going to borrowers such as small business owners or investors buying properties they intend to rent who can demonstrate an ability to repay, verifiable through bank or brokerage statements.”
Lenders say they check for assets to pay 6 to 12 months of mortgage payments while requiring high down payments to reduce risk.
Stated income loans are now being called by other names to avoid the stigma they received during the housing market collapse. Some banks advertise the new loans as alternative document loans, portfolio programs, asset-based loans or alternative-income verification loans.
The new CFPB mortgage rules do not have a specific minimum for assets necessary to demonstrate an ability to repay a home loan, although critics say a year’s worth of payments for a 30-year loan may be inadequate.
Borrowers must typically have a credit score of at least 700 for these loans, although some lenders, such as Western Bancorp, accept scores as low as 620. Borrowers of a stated income loan usually pay 0.5% to 0.75% above conventional mortgage rates.
Small business owners in particular are targeted for these loans, as their personal tax returns may not reflect their ability to repay. Many keep income in the business to reduce personal income tax obligations, for example.
Meanwhile, other lenders are lowering credit standards to increase mortgage business. Wells Fargo this year announced it will not make mortgages to borrowers with a credit score as low as 600, down from its previous limit of 640.
To further increase mortgage lending, Wells Fargo also announced recently that it has increased the top commission rate for its loan officers to 70 basis points, up from 63 basis points. This is designed to give loan officers extra incentive to increase loan production.