Stated Income Loans & New Alternatives for Self-Employed Mortgages

What is a stated income loan?

A stated income loan is a mortgage that lets a borrower report income without providing tax returns, pay stubs, or W-2s. American Financing no longer offers this loan type for owner-occupied homes because the 2010 Dodd-Frank Act requires lenders to verify a borrower's ability to repay. Lenders used to approve these “stated income” loans based on a borrower's claimed income alone, and that lack of verification was one of the practices that contributed to the 2008 housing market crash.

The 2010 Dodd-Frank Act transformed this loan product for the better. Today, borrowers cannot take out a home loan without providing proof of their ability to repay the loan. Lenders must fully document this proof and borrowers are required to submit the proper documentation. However, stated income loans require no income documentation nor tax returns for self-employed borrowers. Since Dodd-Frank, it is now illegal for any consumer to get this loan type for an owner-occupant property.

For your average employed borrower, documentation includes tax returns, W-2 forms, and recent pay stubs to qualify for a typical conventional mortgage. Self-employed borrowers have higher requirements because their income is subject to change. Lenders typically require very little documentation and no income verification for stated income loans. Instead, they prefer borrowers to have a good credit score, a large number of reserves, and a significant down payment. The better financial picture you can paint for lenders — the more likely you are to be approved and get favorable interest rates.

How can you qualify?

To compensate for the risk being taken by your mortgage lender, stated income loans usually require the following:

• Large amount in savings

• High credit score requirement (700+)

• Bank statements are needed

• High level of income

Do stated income loans make sense for you?

Many borrowers use these loans to buy another rental property, or they’re flipping a property to sell but need a loan to renovate their flip. Others use these loans temporarily because they have a big cash advance coming but can’t pass up on a particular investment property.

Some investors don’t want to spend all their cash to buy a property. They instead use stated income loans to keep a portion of their capital to use for future investments.

Are stated income loans available?

A stated income loan is no longer available for an owner-occupied home; the 2010 Dodd-Frank Act made undocumented owner-occupied mortgages illegal. American Financing still offers reduced-documentation options for investment properties through the bank statement loan program described below.

Self-employed mortgage alternatives

There are alternative loans that share similar qualities to stated income loans. They're commonly referred to as “alternative income verification loans,” which are also often called “alternative documentation mortgage loans,” or “bank statement loan programs.” All of these terms refer to the same loan product so let's call them bank statement loans. This loan program is most helpful for borrowers who receive their income from many sources, such as those who are self-employed.

Quick guide: Mortgage reserves and assets needed to a buy a home.

Bank statement loan program

This loan type is a flexible and affordable option for self-employed borrowers. With a bank statement loan, borrowers can purchase or refinance a home without having to provide tax returns and too much documentation. They are also easier to qualify for than the standard stated income loan. Best of all, you can finance an owner-occupied home without having to worry about the legalities of Dodd-Frank.

How to qualify?

The following are requirements for the bank statement loan program.

• Must be in business for 2+ years

• Low credit score requirement (600+)

• Provide documentation such as:

  • Your business license

  • 12 months of personal and 24 months of business bank statements

  • Expense ratio

  • Signed CPA letter stating you are still in business

Loan program comparison

A stated income loan and a bank statement loan both let self-employed borrowers skip tax returns, but only the bank statement loan is still available on an owner-occupied home, since it verifies cash flow through bank deposits instead of a stated number. Whether you're an entrepreneur, freelancer, or small business owner buying your next property, American Financing's bank statement loan program offers easier qualifying with a lower credit-score minimum.

*Availability of stated income and bank statement loan options can shift with investor demand for non-QM loans, so confirm current options with American Financing before you apply.

Stated income loan FAQs

What is a stated income loan? A stated income loan is a mortgage that lets a borrower report income without providing tax returns, pay stubs, or W-2s. American Financing no longer offers this loan type for owner-occupied homes because the 2010 Dodd-Frank Act requires lenders to verify a borrower's ability to repay. Lenders used to approve these “stated income” loans based on a borrower's claimed income alone, and that lack of verification was one of the practices that contributed to the 2008 housing market crash.

Are stated income loans still available? A stated income loan is no longer available for an owner-occupied home; the 2010 Dodd-Frank Act made undocumented owner-occupied mortgages illegal. American Financing still offers reduced-documentation options for investment properties through the bank statement loan program described below.

What's the difference between a stated income loan and a bank statement loan? A stated income loan and a bank statement loan both let self-employed borrowers skip tax returns, but only the bank statement loan is still available on an owner-occupied home, since it verifies cash flow through bank deposits instead of a stated number. American Financing's bank statement loan program offers easier qualifying with a lower credit-score minimum.