Mighty Mortgages

A stated income home equity loan is one where your bank or mortgage lender does not confirm your income or assets in order to give you an approval. While this seems hard to believe at first, this type of loan does indeed exist and has been a saving grace for those who are self-employed, earn commissions on sales or otherwise have difficulty supporting their income with traditional documentation. Because of the additional risk taken on by the lender with a stated income home equity loan, the borrower usually has to have an above average credit report or FICO score.

How much you can borrow

Sometimes called a “business for self” or “alt a”, this loan allows you to borrow money against the equity you have built up in your home. The amount of equity you have is calculated by subtracting the amount you currently owe on your mortgage (if any) from the current value of the property. For example if your home is currently appraised at $240,000 and you owe $60,000 on it, then you have built up $180,000 in equity. Some stated income home equity loans would permit you to access the whole $180,000 or in other words, refinance up to 100% of the property value.

Purposes for a stated income home equity loan

You can use the proceeds from a home equity loan for whatever you wish. Some of the more common uses are:

• Renovations
• Medical expenses
• Children’s University expenses
• Consolidate credit card debt and/or personal loans
• Vacation
• Purchase a vehicle
• Purchase an investment
• Purchase a rental property

So you can see there are many good reasons to borrow money against the equity in your home, but before the introduction of the stated income home equity loan, it was hard to get approved if you could not provide supporting documentation to prove how much money you make.

Why stated income

The need for this product came about to address the difficulty the self-employed and business owners have meeting the regular mortgage approval criteria imposed by banks, financial institutions and mortgage lenders. Payment affordability is a major criteria lenders consider when determining whether or not to grant a loan. Usually there is a threshold where the lender will not allow your expenses, including mortgage and loan payments, to exceed a certain percentage of your monthly income. This is called your DSR or debt service ratio.

Easier to qualify

The problem with the self-employed is that they legitimately write-off lots of business expenses, which reduces their documented income. Let’s take a cell phone for example. A regular salaried employee may have a monthly cell phone bill which they pay and it has no effect on their documented income. Someone who is in business for themself could have that same cell phone bill, but because they also use it for business purposes, they can subtract that expense and reduce the amount of income they report and have to pay tax on. There are many types of expenses such as this and a good accountant will take advantage of as many of them as possible. This is great for the self employed personal at tax time, as they are reporting a very low income. However it is not so good when they wish to apply for a loan or mortgage, because their income docs suggest their income is not high enough to afford the payments. Of course they can afford the payments, because their actual income is much greater than what they can prove.

When these individuals are applying for credit under traditional, full documentation guidelines, because their reported income is great enough to qualify, they often have to show that their income has consistently been at this level for a number of years. Financial institutions and mortgage lenders realize that the nature of a small business can include volatile revenue so they want to ensure that they income level they are applying with is not an anomaly due to an uncharacteristically successful year. Again, just one more reason why the stated income home equity loan is so desperately needed by this particular market segment.

Who is eligible

It is not just full time self employed people or small business owners who may apply for a stated income home equity loan. There are many circumstances where a regular salaried employee earns additional income beyond what is reported on their pay stub. This could include money from a hobby, internet business, or a second job to state just a few examples. In each of these situations the borrower could benefit from the stated income conditions and access the equity in their home where they otherwise may not have been able to.

Mortgage customers come with all sorts of different personal financial circumstances. Often a cookie cutter, one size fits all product will not be sufficient to meet the needs of the entire market. Innovative borrowing solutions like the stated income home equity loan are just one example of the industry taking notice that it needs to be flexible.

Getting a mortgage with bad credit attempts to bypass one of the most important criteria that determines whether or not you can get a loan: your previous credit history. So much depends on your credit record and how you have handled your previous responsibilities. A poor credit history suggests that your loan application will have difficulty being approved. This problem is made worse if you have declared bankruptcy or been foreclosed upon. This previous credit challenges will also get in the way of applications for home equity loans and second mortgages. However all hope is not lost and people with bad credit can get mortgages or financing to buy a home. Bad credit mortgages are available to people who need them. They are a little harder to find so you really have to do your research to connect with a lender who specializes in your type of situation.

These are what are referred to as sub-prime lenders. Banks and credit unions would be prime lenders and mortgage finance companies that charge higher rates and fees to borrowers with poor credit are sub-prime lenders. The have got a lot of bad press lately, but there is a market to lend to people with lower credit ratings. Often these individuals have found themselves in this situation due to circumstances beyond their control. Any number of reasons such as job layoffs, medical expenses, marital breakdowns can contribute to the decline of someone’s credit rating. Once the problems are put into the past the borrower may be an excellent client, but with their bad credit rating, they will not have the same options available to them as borrowers with a clean credit report. Before getting a mortgage with bad credit from a sub-prime lender it is imperative that the borrower review all of their options and if they intend to proceed they must read carefully all the fine print. The costs and fees can be unreasonable and the borrower needs to make themselves familiar with all the details.

And remember it is possible to find a loan at a good interest rate and acceptable charges, even if you have a poor credit history. If you are in this situation, talk to real estate agents, mortgage brokers and online lenders. You can get a good deal.

In this case comparison shopping is even more critical. Compare and review and you can be certain that you will get a mortgage with bad credit that has a reasonable interest rate and affordable payments.

Owning your own home is a dream come true for many people. Finally being free from paying rent to somebody else and effectively paying down their mortgage can be a great source of satisfaction. Now that you own a home you have more borrowing options available to you when you need them. Specifically if you have paid down your mortgage balance significantly you may be eligible for an interest only home equity line of credit.

Sometimes called a HELOC, this can assist you in addressing a wide variety of financial circumstances. Whatever you needs are you can access these funds and distribute them however you wish.

You must exercise caution however, because you are pledging your home as security for the interest only home equity line of credit. If you fail to make your payments on time as agreed you could lose your house. The responsibilities and consequences are the same as for your original mortgage loan.

Some expenses just can not be avoided. Examples are medical bills or children’s’ university tuition. In these cases taking out an interest only home equity line of credit will enable you to access funds at the lowest rates possible. There is not really a downside once you acknowledge that they money is going to have to be spent one way or another regardless.

Another popular purpose for a HELOC is debt consolidation. Simply put, compared to the interest rates being charged on credit cards or other unsecured borrowing options; the interest rate on this line of credit is significantly lower.

Remember not to lose sight of the fact that your home is collateral for this and you must make your payments or risk losing it.

You need to be honest with yourself about how disciplined your are. If you just make interest payments on an interest only line of credit it will obviously never get paid off. The flexibility allows you to make lower payments around times when cash flow is tighter, like Christmas for example. But if you are not someone who will make regular principal payments then you may be best off by applying for a Home Equity Loan instead. With a Home Equity Loan your payment will always include an amount that is going towards paying down the principal.

It is thus recommendable that while you are considering the flexibility of a credit line, if you need a lump sum fund, you may consider taking out a Home Equity Loan instead. This is because in a home equity loan, you pay the interest and part of the principal debt regularly.

The bottom line is that when purchasing your home you have acquired an asset that is valuable to you in many ways. Not only for the roof that it puts over your head, but for they new lending power it has extended to you. An interest only home equity line of credit is a flexible and beneficial tool, but like all tools it must be handled with tremendous care and responsibility.

Interest-only loans are the latest method to deal with high home prices. Interest only mortgages allow borrowers to have a lower initial payment and are a good option if you believe you will have a greater income later on. Interest only mortgages are often the only way that first time home buyers can afford to pay for a mortgage, at least in the first few years.

By definition interest only mortgages are loans that allow the borrower to pay only the interest on the loan for a predetermined period of time. During this period none of your monthly payment is going towards the principal.

Interest-only mortgages can be a wonderful way to enter the housing market. They are often used when home prices are so high that a conventional mortgage payment is out of the question. They are becoming more popular as borrowers attempt to reduce their monthly mortgage payments when interest rates are rising.

Interest-only mortgages can be beneficial in some cases, but the best way to repay a mortgage loan for most people is still to set up a fixed amortization. If the only way a buyer can afford to purchase a home is with little or no down payment and interest only monthly payments, it may be an indication that they are taking on too much risk. It is not advisable to stretch your budget unrealistically.

Borrowers should only consider this if they are confident that their income will rise over time so that they can meet the increased payment demands when the interest-only period is over.

Remember you aren’t building up any equity when you are only making interest payments; only the increase in value if the home appreciates.

Borrowers with irregular incomes can benefit from interest-only mortgages. These includes the self-employed and commissioned sales people.

Interest-only loans have a slightly higher interest rate, because they are riskier for lenders.

Payments are lower than those of a conventional home loan, because you are paying only the interest charges. Many buyers choose the minimum payment option because it cuts their monthly costs by hundreds of dollars and helps them afford their purchase.

Interest only mortgages are a popular but largely misunderstood home loan option that offer low initial payments over a fixed term. Interest only mortgages are going to be more and more popular in the future.

Stated income loans (sometimes called Alt-A) became popular in 2002, and have since become mainstream. They were created by mortgage lenders as a way for those with unconventional, irregular, or cash incomes to qualify for a mortgage loan. These individuals have the income to afford a mortgage and have acceptable credit, but earn income that is not easily verified. For example self-employed and commissioned borrowers often make more money than they can prove. The stated income home loans do not require you to provide your pay stubs, W2s, 1099s, tax returns, and other documentation required to verify your income. Instead you simply state what your income is and the bank or mortgage lender believes you. (more…)