No Income Verification Loans
When applying for a new loan, the lender will usually ask the borrower to provide income verification in the form of a W-2 tax document, paystubs, or a letter from their employer. This documentation gives the lender an idea of how much money the buyer can afford to pay for a new home. A no income verification loan, otherwise known as a stated loan, removes income verification from the application process. With this type of loan, the borrower is asked to state their income in good faith, without any formal documentation required.
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Understanding the Drawbacks
These loans were common in the early to mid-2000’s, and quickly became regulated after the housing market bubble crash. A stated loan is a risk to both lenders and borrowers, and most banks will not offer this type of loan anymore. These loans are hard to come by and are mostly offered to people who are self-employed. Banks that do offer a loan without income verification will often charge up to twice the current interest rate.
Alternatives to Traditional Income Verification
A buyer who is self-employed is a good candidate for this type of loan. When you work for yourself, it can be a bit more difficult to prove income verification. In these cases, lenders will take a closer look at the borrower’s debt to income (DTI) ratio. Lenders might also ask for a larger down payment (up to 40%) and require that the borrower has a good FICO credit score in order to qualify for a loan. In lieu of a standard W-2, a bank might ask the borrower to provide:
- A list of assets – The lender will look at your assets over the last 60 days (deposits made, or funds withdrawn). If you own other property and have built up a lot of equity, this can count in your favor. If you have a high debt to income ratio, this can count against you.
- Proof of money in reserves – A bank will usually want to see that you have at least 12 months’ worth of mortgage payments available for immediate access in cash reserves.
- Credit scores – Typically, a lender will require a score of 720 or higher to approve this type of loan. A higher credit score can help establish you as a reliable candidate.
- Proof of company ownership – If you run your own business, the lender might ask to see proof of ownership in the form of alternative tax documents, a letter from your accountant, or a record of the business EIN (employment identification number).
- A sizeable down payment – Without traditional income verification, the buyer will usually be required to put down a larger down payment (35% on average).
