A stated income loan is when a borrower does not provide income documentation such as bank statements, tax returns, or W2’s. Rather, the borrower simply states their income on the loan application. After the government passed Dodd-Frank in 2010, stated income loans are only permitted for business purpose loans, not consumer loans. As explained in previous blogs, a business purpose loan is business related, including purchasing/renovating an investment property or using loan proceeds to improve a business. Borrowers must demonstrate their ability to repay on consumer purpose loans, including the purchase of a primary residence or a refinance for consolidating personal debt.
Stated income loans were the primary cause of the 2008 recession, which caused millions of people to lose their homes and jobs. The devastating economic result reveals the lender’s obligation to verify ability-to-repay on consumer loans. Borrowers must beware of lenders that are advertising stated income consumer loans. This is a direct violation of Dodd-Frank and may be subject to legal action. If you google “stated income loans”, there are several lenders advertising they can do it, especially for self-employed borrowers.
Lenders present a convoluted message when they claim they can do consumer purpose stated income loans for self-employed borrowers. Just because a borrower is self-employed, one cannot automatically assume that the loan is for business purpose. A letter of explanation outlining the loan purpose and exit strategy in addition to proof of the business purpose (investment property purchase contract, renovation construction cost breakdown, etc.) is crucial for verification purposes. The reason why this verification process is so vital is because we do not want a repeat of the 2008 economic collapse.