The Income Solving home loan has been designed to fill the gap for those folks that can’t qualify when they have to provide their Federal Income Tax Returns. Current rules for obtaining a Conventional or FHA loan require the applicant to provide tax returns to prove they make enough income to qualify for a home loan. This traditional style of qualifying for a home loan can leave an entire segment of the population out for qualifying for Conventional, or FHA and even VA home loans. So, the market place has come up with a type of loan that will comply with the current laws and allow for those that are self-employed or on commission to be able to qualify for a home loan without having to provide Federal Tax Returns. You may have even heard them advertised as Income Solving Mortgages.
The current law states that a borrower must be able to show “the ability to repay” the mortgage when applying for an owner-occupied home loan. This does not hold true for properties that are being purchased as a rental or for business purposes. So how have lenders come up with ways to avoid providing Federal Tax Returns? First, you may want to ask why not show the tax returns? The answer is simple as people that are self-employed or on commission don’t get the luxury of company expense accounts, paid health care, and other expenses. So those folks may make more than enough money to actually make the payments they just have to write off so many other expenses that a normal salaried person may not need to. This, in turn, lowers the income shown on their tax returns and, in some cases, may take them out of being able to qualify for a traditional home loan with their tax return.
The solution to being able to show “the ability to repay the loan” comes in the form of showing the actual income made by the individual. Showing the income can be best done by showing the deposits made to a business or personal bank account. For example; a borrower may show $300,000 in deposits for a year and yet their tax returns after expenses only show an income of $25,000. If we are allowed to look at the deposit record and apply the actual expenses of running their business their income would be far greater and probably enough to qualify for what they wish to purchase. So, to prove deposits we would require a borrower to bring in one or two years of bank statements to support their “ability to repay the loan”. We may also ask for a year-to-date profit and loss with the true income and expenses minus any paper write offs like depreciation.
We have all heard of the Stated Income Loan, unless you entirely missed the mortgage meltdown from 2006-2011. Assuming you did not miss the meltdown, you know that this type of lending was one of the causes, stated by the Government, for the Mortgage Meltdown. But we, as consumers, and those of us in the industry, keep hearing rumblings of this loan re-emerging as a viable product. So let me dispel the myth of this loan coming back for those of you who wish to purchase a home that you intend to use as your primary residence. The Dodd-Frank Act of 2010 made this type of loan basically illegal for lenders to offer on owner occupied loans. The fact that you have to income qualify for a loan on a primary residence, makes it that much harder for those Americans that are self-employed or derive their income from other than salaried jobs.
However, knowing what the law states and how it is interpreted makes a great deal of difference in the way lenders derive loan programs. The laws states that a lender must verify that the borrower has the ability re-pay the loan, it further goes on to say that a borrower’s total debt, including their primary housing payments, must not exceed 43% of their total gross income. Ok, that was a lot of lender babble, so let’s break it down. We have to explore what income is, and how a lender has to determine if you have the ability to re-pay the loan.
Let’s start by defining income, and to some (in high places in Government) it is cut and dry, you get a salary and that is your income. Say you are self-employed, or are paid a commission, or you have rental properties, or other investments. Determining income becomes quite difficult. The Government has tried to stick everyone in a uniform box that really only fits a select few. We are starting to see some logic come from lenders now in the way they are viewing income, but not from your big 4 loan types (Conventional, FHA, VA, and Jumbo loans) which are typically sold to government owned agencies like FNMA, FHLMC and GNMA. There becomes opportunity to do things differently when loans are not being sold to those Agencies. Private lenders have to work under the rules of the Dodd-Frank Act and the Real Estate Settlement and Procedures Act (RESPA) when doing a primary residence loan, but they have a little more risk tolerance than the “Big 4”. What this means is that they can view income calculations a little different than the Big 4 are mandated to by their Governmental Big Brother. We are not going to see stated income loans or any derivative ever coming from loans that are being sold to the Big 4, for no other reason than they are not mandated to do so. We can see more creative ways of viewing one’s income starting to emerge from private funding sources. A great example would be looking at the deposits being made every month into a borrower’s bank account. More specifically deriving a qualifying income through an average of the monthly deposits into a borrower’s personal bank account. This is very creative and can help borrowers obtain financing where they have been locked out of until now. These types of loans are being called “Bank Statement Loans” and are perfectly legal under current laws. One would have to agree that if the deposits are consistent in nature every month that this can be viewed as a valid income source or, as law states, proof of the “ability to re-pay” the loan.
Although, the income is not verified in the traditional way with pay-stub, W2’s and Tax Returns, we know the borrower has the ability to re-pay the loan by the deposits he or she makes. The interest rates for this type of loan is higher than the Big 4 rates, but it allows for folks that would not otherwise qualify, qualify. By having the bank statements over 6 month to a year period also allows a lender to establish payment patterns which can also reduce risk to the lender. Using this method of deriving income can help those who are self-employed or otherwise do not show a high income on their tax returns but actually have the income. Here at MAE Capital Mortgage Inc. we are doing these loans right now helping folks who have been lost by the system.
Now the flip side to all of this are those loans that do not fall under Dodd-Frank or RESPA. Those are loans on properties used for investment purposes or that are non-owner occupied. We are not legally obligated to verify an income source, or that the borrower has the “ability to re-pay” on investment property, or property that is used for business purposes. This is true, it has now become a lot easier to get a loan on an investment property that your own home. Although, loans that were done on investment properties during the Mortgage Meltdown were the first ones to default, the Government did not include these properties in their new laws. So the door is wide open for investment property loans and we have several products for investment properties that do not require us verify any income source. These loans are done based on the equity position in a property. In other words, the more equity or down payment you have in an investment property the easier it is to get the loan. This holds true for all types of investment property from raw land, to giant commercial properties and everything in between. The theory is simple; people that have large amounts of their own money into a property the less likely they will default on a loan.
So we now know that it is not legal to do a stated income loan for property that is intended to be a primary residence, but we can do them for investment property. In fact, in today’s lending environment it is far easier to get a loan on an investment property than it is on your primary residence. This change is remarkable in that the American Dream is to own your own home but it has become a whole lot harder to reach that dream. I would not get the idea to tell a lender you are not going to live in a home when you actually are just to get a no income verified loan, this is fraud and you can be prosecuted for loan fraud if you do something like this; and you are not the first to think of it. At MAE Capital Real Estate and Loan we walk you through all your possibilities and we look forward to working with you. For more information on the investment property loans that do not require an income check click here. As usual any comments you might have please leave them and start a discussion.