How The Return Of Stated Income Loans Affects Real Estate

Q: Gerald, my mortgage broker told me that he offers stated income loans now.  How will the return of stated income loans affect real estate? Carl, Bronx, NY

A: Stated income loans are often cited as one of the main causes of the financial crisis of 2008. In the early and mid 2000s, banks approved home mortgages without verifying income, pay stubs or tax returns. Since the financial crisis, banks have tightened lending restrictions for mortgages. In fact, current regulations put lenders who fail to verify a borrower’s ability to repay a loan at risk of having those mortgages challenged in court.

Stated income loans have made a comeback recently nonetheless. The Dodd-Frank Act of 2010 essentially made stated-income home loans illegal in owner-occupied situations. So, this time around, borrowers can’t use stated income loans for occupied personal residences, they can pursue them to fund investment properties they intend to rent or flip.

One of the main advantages of a stated-income loan is that they require less documentation than standard, “full-documentation” loans and therefore often can often be completed faster. Speed is important to investors who may have a tight window to decide whether to buy a property to rent or flip.

Be prepared to show a higher-than-standard credit score and down payment for a stated income loan than you would for a traditional or full-documentation loan. Some of the other disadvantages of a stated-income loan are that they often have higher interest rates and higher closing costs.

In a nutshell, the return of stated income loans affects real estate by providing more financing options for real estate investors.

Thanks for your question, Carl. For more real estate information and tips visit my blog at geraldlucas.com.