Definition:
A stated income mortgage is a type of home loan where the borrower is not required to provide extensive documentation of their income, such as tax returns or pay stubs. Instead, the borrower simply states their income on the application, and the lender takes that at face value when determining whether the borrower qualifies for the loan. This type of mortgage is typically used for self-employed individuals or those with non-traditional income sources who may not have the standard documentation that traditional mortgages require.

How a stated income mortgage works

With a stated income mortgage, the borrower is asked to provide only a statement of their income, without supporting documents like pay slips or tax returns. The lender may still assess other aspects of the borrower’s financial situation, such as their credit score, assets, and the value of the property, to determine if they are eligible for the loan.

Since no verification of income is required, these loans typically come with higher interest rates and stricter terms compared to traditional mortgages. Lenders often consider the increased risk of lending without confirming the borrower’s income, which may lead to a higher cost for the borrower.

Why stated income mortgages are used

Stated income mortgages can be helpful in certain situations:

• Self-employed individuals: Many self-employed individuals may not have consistent salary-based income or the necessary documentation, such as tax returns or W-2s, to apply for a traditional mortgage. A stated income mortgage allows them to qualify for a home loan based on their own estimation of income.
• Non-traditional income sources: Borrowers who receive income from non-traditional sources, such as investments, rentals, or freelance work, may find it difficult to provide standard documentation for a conventional mortgage. A stated income mortgage can provide a more flexible solution.
• Simplified process: The process is faster and less paperwork-intensive than a conventional mortgage, which can appeal to borrowers who are looking to streamline their application process.

Benefits of a stated income mortgage

There are several benefits to stated income mortgages:

• Faster approval process: Since borrowers are not required to submit extensive documentation to verify their income, the approval process can be faster and more straightforward.
• Accessibility for self-employed or non-traditional borrowers: This mortgage type is ideal for self-employed individuals, freelancers, or those with irregular income who may have difficulty providing the standard documents required for a traditional mortgage.
• Flexibility: Stated income mortgages allow for greater flexibility in terms of how income is reported and can accommodate a wide range of income types and business structures.

Drawbacks of a stated income mortgage

While stated income mortgages provide benefits, they also have some risks and disadvantages:

• Higher interest rates: Because the lender is taking on more risk by not verifying the borrower’s income, they typically charge higher interest rates on stated income mortgages compared to traditional loans.
• Lower loan amounts: Since the borrower’s income is not verified, lenders may be less willing to offer large loan amounts, especially if the stated income seems unreasonably high for the borrower’s profile.
• Risk of over-borrowing: Without verifying the borrower’s actual income, there is a risk that the borrower may overstate their income, which could lead to unaffordable loan payments down the road. This poses a risk of default for the lender and financial hardship for the borrower.
• Stricter eligibility requirements: Lenders may impose stricter criteria, such as a higher credit score or a larger down payment, to compensate for the lack of income verification.

Who should consider a stated income mortgage?

Stated income mortgages are typically a good option for:

• Self-employed individuals: If you are self-employed or have irregular income and cannot provide traditional documentation (e.g., tax returns), a stated income mortgage may be a viable option.
• Freelancers and contractors: Those who have freelance or contract-based income may also benefit from stated income mortgages, as their income can be difficult to document using traditional methods.
• Investors: Real estate investors who receive income from rental properties or other investments may use a stated income mortgage if they do not have standard income documentation.

However, borrowers should weigh the higher interest rates and potentially lower loan amounts when deciding if a stated income mortgage is the right option for them.

How to apply for a stated income mortgage

To apply for a stated income mortgage, borrowers typically need to:

1. Provide basic financial information: You’ll need to provide a range of financial details, including your assets, liabilities, and any other income sources, as well as the property details.
2. State your income: Unlike traditional mortgages, you will state your income on the application without providing supporting documents like pay stubs or tax returns. Be honest, as exaggerating income can lead to loan default or legal issues.
3. Meet eligibility criteria: Lenders may still require a solid credit score, a sizable down payment, and a reasonable debt-to-income ratio before approving the mortgage.
4. Prepare for higher costs: Since these loans carry higher interest rates and may require additional documentation (such as proof of assets or reserves), be prepared for potentially higher monthly payments compared to traditional mortgages.

Alternatives to a stated income mortgage

If you are self-employed or have irregular income but are concerned about the higher rates of a stated income mortgage, consider these alternatives:

• Alternative documentation loans: Some lenders offer loans that allow you to submit alternative forms of documentation, such as bank statements or profit-and-loss statements, instead of traditional pay stubs or tax returns.
• Subprime mortgages: If your credit is less than perfect, a subprime mortgage could offer you access to a loan, but these come with higher rates and terms, similar to stated income loans.
• Government-backed loans: If you are eligible, government-backed mortgages like the Canada Mortgage and Housing Corporation (CMHC) programs can help provide financing options with more flexible qualification criteria, though they may still require some form of income verification.

Last modified: November 12, 2024