Remember the days of the “Stated Income” loan? They weren’t that long ago, having fizzled away and disappeared in to the fog of “alternative lending” programs that are no longer with us. While many alternative and subprime mortgage products needed to disappear in order to bring the realm of real estate financing and markets reliant upon it back to a more sustainable level, the stated income loan is sorely missed.
The stated income loan was designed to meet the specific needs of the self-employed, commissioned 
or bonus receiving homeowners. People receiving irregular revenue streams with spiking expenses who have exhibited a successful track record of budgeting to accommodate those ups and downs. These are financially savvy people who have owned their businesses or been in their commission/bonus positions for more than 2 years. They are continually making strategic decisions when it comes to their finances, both business and personal.
While we used to be able to offer a stated income real estate loan program to this type of borrower, creating a smoother loan process for them while limiting the stacks of income documentation we would need by not asking them to verify their income with more than their exhibited ability to pay (payment history/credit scores) and their CPA’s verification of their business or their business license, those days are gone. The self-employed, irregular income/expensed borrowers now need to drag out their tax returns and qualify based on the income and expenses they have reported and filed. The net verifiable income they pay taxes on (forget about any cash revenue!), after their business expenses are deducted.
Typically, the most recent two years of personal and business returns will be required. If you are a “sole proprietor” filing Schedule C, the lender/bank’s underwriter will average your line 12 income for each tax year adding back any depreciation/depletion expense on your Schedule Cs. If your business is incorporated or a partnership, 1120/1065 tax returns will be required for the underwriter’s review in addition to your personal tax returns. In all cases, a two year average of your reported net income for the most recent two tax years usually is used to determine your income and level out the spikes and dips that business/ commissioned/ bonus income earners typically experience. These days, as in days past, declining income is a big no-no.
Do you have bills you are personally liable for that pass through your business like credit cards, vehicle loans, or other installment loans? If you can prove these bills are paid by the business by providing 12 months cancelled checks, we will not need to count these bills when qualifying you. Regularly have vehicle loans that are traded in/sold, and you have acquired another one during that 12 months? We can usually still work with this, by exhibiting you have a history of doing this. Otherwise, the new vehicle loan payment will need to be counted in your personal obligations when we qualify you.
Planning to buy a home or investment property in the Rogue Valley in Oregon and have irregular income and expense as referenced above? Make sure you get preapproved for your real estate financing before you go “house hunting”, as the rules probably have changed since the last time you applied for a loan, secured or unsecured. We hear a lot these days about “credit tightening”, and it is your market segment in real estate and business financing that has been most affected by this lack of flexibility in underwriting criteria. Best to check in and make sure the financing you are counting on is available, and plan ahead as you may find you don’t qualify for the amounts you could have qualified for in the past. The rules have changed a lot in the past two years!
See you at the closing table!
Karen Cooper – OR/CA Mortgage Consultant – www.Quality4Loans.com
For additional tips on How To Buy A Home In The Rogue Valley, Oregon, follow these links:
How To Buy A Home in the Rogue Valley, Oregon | Using Neighborhood Stabilization Program Funds
How To Buy a Home In The Rogue Valley, Oregon | Using The FHA Home Loan
How To Buy A Home In The Rogue Valley, Oregon | Using City Of Medford First Time Buyer Program
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