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.

Fortunately with a mortgage refinance, bad credit loans are providing homeowners in distress more options than they have ever had in the past. Previously there were few things more stressful in life than the prospect of losing your home. The thought of being homeless is terrifying and for a family with children the fear of the unknown could be downright paralysing.

A home is more than simply a roof over your head and a place to go to sleep at night. A home represents safety and security. A home is where we find solace as family pulls together to face life’s challenges. Unfortunately as we meet those challenges, they put into jeopardy one of they things that has provided us with the strength we needed. Family illness, job loss, marital breakdown and death can all be financially devastating. The soundest of financial plans can come undone when facing one of these setbacks. While we pool resources to where they are most needed, other bills go unpaid, credit ratings drop and loans go into default. But by applying for a mortgage refinance, bad credit loans can be cleared and you can have a fresh start.

It goes without saying that when you borrow to buy a home, it is critical to meet your monthly obligations. If you fail to do so you seriously run the risk of the financial institution taking legal action against you to foreclose upon your home. This is the extreme case, but it does happen none the less. It is in times like these that it is very important to consult with a lawyer and understand the ramifications of you any further actions you take. If you hope to arrange a mortgage refinance, bad credit loans that are mishandled could stand in your way. You do not want to compound one problem, by acting prematurely and creating another one.

Rewriting your mortgage to resolve outstanding debts can help keep your house even though you have missed payments. While bad credit is a term that certainly carries a negative stigma it in and of itself does not make you a bad person or say definitively that you will not pay any future loans as agreed. There are mortgage brokers that will shop for you to find a lender that is willing to look past the numbers and understand the circumstances that have put you in the situation that you now find yourself.

You may have to concede to paying a higher interest rate after refinancing but if this allows you to keep your home and avoid foreclosure it may be a small price to pay, especially when you compare it to the alternative. So while your bad luck may have just been poor timing with a mortgage refinance, bad credit loan suffering could be eliminated as well.

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.