No pulling out tax returns, pay check stubs, or bank statements.
Just your word.
For a potential home owner who is newly self-employed or who works for tips (that might go unreported for taxes), this sort of thing is very attractive, even if you have to take a hit on the mortgage rate.
Not too long ago this is sort of how it worked. Before the mortgage meltdown, you could get a home loan with a slightly higher mortgage rate without verification of your income. These were called stated income mortgages.
Now often referred to as “liar loans”, because some people would lie about their incomes and end up defaulting on their homes. It’s not a stretch to say that these types of loans, and the subsequent investments made on these loans are what caused the crisis.
I’d Like a Stated Income Mortgage, Please
I recently contacted a few mortgage brokers to inquire about getting a home loan. I shared with them that I’m newly self-employed. Since I don’t have a pay check to show potential lenders, they ask for tax records and financial statements before they loan money to me.
While I plan on being able to report a solid income from my self-employed activities at the end of this year, my previous years aren’t as impressive.
Therefore, I doubt they will lend to me right now. I’ve been asking around about a possible “stated income mortgage”, and the word is that no one is doing these loans anymore. Period.
Alternatives to the State Income Mortgage
It appears that the financial reform bill being discussed in Congress will effectively put the kibosh on stated income mortgages. So, what’s a newly self-employed person to do? Here are your alternatives:
- Pay Cash – If you have the cash, or are at least close, consider paying for your home in cash. Easier said than done, right? Don’t say it can’t be done though. An Ohio teen just bought her first home outright with her 4-H earnings.
- Wait Till You Show Solid Income – Most lenders will loan to the self-employed who can show solid evidence of a successful business. The rule I keep hearing is 2 years of income. However, some mortgage brokers I talked with said that 1 year might be enough. Budget $500-$1,000 to have a CPA prepare your financial statements and tax return this next January. You could be in your home by February 2011.
- Get a Paycheck – A quicker way to get a mortgage would be to get a salaried job, at least in the temporary. Being able to show a steady income, especially if you can show history in that industry, will quickly get you a mortgage, all things being equal.
Visit my new mortgage rate table page to see the most up to date listings of home purchase and refinance mortgage rates.