Lenders of traditional mortgages often use a formula to determine how much monthly payment an individual is capable of making. The rule is that the debt should be no more than forty-three percent of the person’s income. Those who build their income through investments or other self-employment means often face problems getting approved for the property they may want. Fortunately, stated income financing can provide a solution.
Independent investors may often meet difficulties qualifying for traditional mortgage because their official income shown on their tax return is often much lower than what they actually have. This is because the IRS tax laws allow self-employees to deduct all expenses which may artificially lower their taxable income. On one hand this is a huge benefit since lower income equals lower tax liability. On the other hand, lenders of traditional mortgages may not approve specific mortgages because they do not meet the income-to-debt ratio criteria.
Stated income financing allows independent investors to get mortgage through non-traditional means. Lenders who provide stated income loans allow borrowers to use documents other than their tax return to determine whether they are qualified. A common document used in stated income loans is a bank statement, which can often provide a more accurate description of an individual’s income and expenses than a tax return. It also shows how the person’s total assets. This way the lender can see whether the person has enough money on reserve to pay a portion of the mortgage incase the income stops. The general rule is that lenders prefer at least twelve months of mortgage payments in the bank.
Other lenders may not even require such specific documents to prove your level of income and assets. However, they will require proof of your employment or a letter from your CPA letting them know how you earn a living. Based on this information, they can ascertain how much money you may realistically be making and how much you can afford.
Stated income financing may have stricter requirements than traditional mortgages. First, you will need to have a good credit score. This assures lenders that you will not miss out on mortgage payments. Additionally, lenders may also require that you put down a larger down payment on the house—at least twenty percent, though more may be common. For traditional mortgages, you may have been able to put down five percent down payment. The interest rates are also commonly higher than traditional mortgages.
Stated income financing provides a way for individuals who don’t earn a living by traditional means to be able to qualify for a mortgage. This way, you may be able to purchase property that otherwise may have been denied.
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