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.

Today we are going to discuss the combination of two great borrowing solutions known as the stated income home equity line of credit. This flexible product allows a homeowner to borrow against the equity built up in the home on a revolving credit line without have to provide documentation to support how much money he makes.

I covered previously in my article called Stated Income Home Loans, that the self-employed, small business owners and commissioned sales people often have a difficult time proving to a mortgage lender or other financial institution how what their true level of income is. They do not get W2s or pay stubs in the traditional sense and often “write-off” a large portion of their income to legitimate business expenses. This leaves them falling short of the debt service ratios that banks use when qualifying borrowers for loans and mortgages.

The stated income loan was introduced to address that problem by allowing strong borrowers to obtain credit without have to provide documentation to prove their income level. While this brought with it a bunch of new challenges for lenders, it allowed the self-employed and commissioned sales people to borrow money with greater ease.

A home equity line of credit is simply a revolving credit line that uses the equity you have built up in your home as collateral. Banks love real estate security and will gladly offer high limits and low interest rates in return for it. Once set up, a HELOC allows you borrow funds whenever you wish. As that amount is paid down, it becomes available to you to borrow again up to the limit of the line of credit. The funds can be used for anything from a down payment on a rental property to a new car to financing your children’s education.

The stated income equity line merges both of these unique needs into one great mortgage product. For those who are unable to support their income by traditional means, yet desire the low rates, high limits and flexibility of HELOC, this combined product is a perfect fit.

A good credit score is still really important. But having said that some stated income programs allow you to borrow up to 100% of the purchase price or the appraised value of the home in the case of a refinance.

Before the sub-prime mortgage meltdown, it was possible to obtain a stated income line of credit without verifying assets either. These are becoming increasingly hard to come by and it is more common to find stated income / verified assets loans and equity lines.

The days of one borrowing solution fits all are long gone. Lenders have gotten more and more creative to meet the unique needs of today’s home buyers. If you are self employed and have built up equity in your home and would like the ability to access it as you need it, instead of all at once in one lump sum, the stated income home equity line of credit was created just for you.

In years past it was much simpler to apply for and be approved for a stated income home loan. You did not need to have an exceptionally high credit score, or even necessarily a down payment and you could be approved for a mortgage without providing documentation supporting your earnings.

Default on Stated Income Loans

Well the landscape has changed and mortgage companies that allow stated income for financing are no longer being as fast a free with handing these out. You need to establish yourself as being much more credit worthy in today’s environment. In the post sub prime mortgage meltdown, default on stated income loans is on the rise.

Introduced as an opportunity for those with income from difficult to verify sources, stated income home loans were a boon for the self employed and commissioned sales people. People in these circumstances often have difficult time providing proof of their earnings. For example, they are not given pay slips, or even W2’s. Sometimes the mortgage rate or associated fees are a little higher, but these costs are offset by the opportunity to purchase home where you otherwise may not by able to under traditional qualifying criteria. And if you FICO score is very high, you can even finance one hundred percent of the purchase price. Naturally, if your credit score is way above average, high interest rates can be mitigated.

Stated Income Mortgage Rules

Hopefully with the tighter controls on qualifying for stated income home loans, they can work toward shaking their stigma as liar loans. You see it was not uncommon for potential home buyers to opt for this program even when they were capable of meeting the requirements of full doc loans. They would misrepresent their borrowing capacity so that they could be approved for a mortgage that was in fact beyond their means. What these applicant don’t realize is that lending institutions have put these policies in place to not only protect themselves from foreclosing, but to protect their clients from being put in a situation that will ultimately be difficult for them to live up to. Stated income home loan rules are put into place for your own protection and it really is not in your best interest to try to circumvent them.

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.

Real estate agents help people who are buying a home find people who are selling a home. A lot of real estate agents also assist property managers by finding tennants for landlords. Often real estate agents are contracted by property management companies to maintain a property while it is listed for sale. They will tend to such matters as ensuring the home is presentable for sale as well as ensuring that the pipes don’t freeze etc in cold weather.

The real estate agents get paid by charging a commission for their services. When they find a buyer for a home that is selling they will get paid a pre-determined percentage of the sale price. If they are carrying out duties for a property manager then they may get paid a percentage of the rent collected.

A lot of trust is placed in realtors. Often the keys to the home are left with them and they have free access to the residence. They will arrange viewings for interested buyers etc. Because it is their business to know what is going on the the real estate market, they are an excellent source of up to date information. In fact, often what a real estate earns for a living is determined by how skillful they are at staying on top of this information.

Realtrs are the best place to turn if you need to know what is going on in the market in a particular region. They can often provide very quick data. They will know what the going prices are for specific types of homes in specific locations. Additionally through their relationships with lenders they can also suggest where you can go to get the lowest mortgage rate possible.

Some who is selling their home can get thousands of dollars more my taking the advice given by a good real esate agent. A good real estate agent will also take the time to understand the unique needs of a home buyer and give suggestion and what type of home they could find given their available budget. He or she will not just give them listings of a bunch of properties but will tailor their suggestions to what they buyer is actually looking for. And remember this type of quality service works in the best interest of the real estate agent as well. The sooner they can sell a home the sooner they will get paid and if they do a good job for both the buyer and the seller the will get more business through referrals.

If you are buying a home or selling a home, ask your friends, family and co-workers if they have any personal recommendations of a real estate agents that they have had good success with. It is so much better to get off on the right foot with a good one then to try to undo they damage, cause by one that is know to be ineffective.