Stated Income Loans

Popular with the self-employed and real estate investors, stated income loans also don’t normally require W-2s, tax returns, or pay stubs for verification. Instead, mortgage professionals often use other means to verify the borrower’s ability to make mortgage payments. These can include bank statements, profit-and-loss statements for businesses, a letter from a certified public accountant, and other means of verifying income.

Who are stated income loans good for? Business owners who have been operating for less than two years. Earners with intermittent or seasonal income. People who pool resources with family members, salaried employees who recently got raises, and others are all good candidates for stated income loans.

• The Pros: As stated income loans generally require less documentation, they can have faster closing periods. They may have more lenient credit score requirements than other loan types; borrowers with at least a 640 credit score can often qualify.
• The Cons: Stated income loans can carry an increased risk for mortgage professionals; the non-QM loans may come with higher interest rates and higher down payment requirements than conventional loans.

No Document Loans

The name is something of a misnomer. It’s really a “fewer documents” loan—far fewer than with traditional mortgages. To qualify for this mortgage program, potential borrowers need to provide evidence they can afford the loan. This proof is often asset-based; the borrower may need to show liquid assets to ensure they can cover the down payment and monthly payments. The documentation could be bank statements for a small business or similar evidence of solvency.

• The Pros: Less paperwork often means faster closing times. There’s usually no employment verification. Would-be borrowers with higher debt-to-income ratios may qualify.
• The Cons: Compared to traditional loans, no income loans can come with stricter terms and higher interest rates.

1099 Only Loans

If you’re a freelancer, an independent contractor, or a gig worker, you’re probably responsible for your own taxes and expenses. Your monthly income likely fluctuates, and you may file a 1099 form with the IRS. With a 1099 loan, a mortgage professional can use one or two years’ worth of 1099s to calculate an average monthly income. The borrower might need to provide documents such as bank statements. In addition, the borrower may have to show that they have enough money in the bank to ensure they can make ongoing mortgage payments.

• The Pros: Higher loan limits; unlike conventional loans such as VA and FHA mortgages, 1099 only loans can have fewer restrictions on the amount you can borrow. This loan type can remove roadblocks that self-employed borrowers could face with other loan types.
• The Cons: Potential borrowers without a two-year history of steady income could find it harder to qualify. Down payment requirements can be higher than those of other mortgage programs.

These Are Not Subprime Loans

Non-QM loans are not “subprime.” Many will recall the Subprime Meltdown of the late 2000s. The moment when a housing bubble—fueled by an overload of home loans to people who couldn’t afford them—finally burst. The U.S. saw unprecedented defaults and foreclosures, leading to the Great Recession.

Since then, thanks to the enactment of safeguard laws, lending standards have greatly improved. Today’s mortgage professionals take far greater care to ensure that borrowers can afford their home loans, adhering to more comprehensive “ability-to-repay” (ATR) rules.

These Are Not Just for Primary Mortgages

Each of these loan programs can be used in multiple ways:

• Buying a property. Purchasing a primary residence is one of the most common reasons borrowers choose non-QM mortgages. And many of these folks are first-time homebuyers. But vacation homes are another popular option. As the loans can be used to buy multi-unit properties, real estate investors often turn to non-QM mortgages.
• Refinancing. For those looking to secure a better interest rate on their current mortgage, a non-QM loan could be the answer. The existing mortgage doesn’t need to be non-QM to qualify. You can also go the other way, refinancing a non-QM mortgage with a traditional loan.
• Cash-Out. Looking for money to make home improvements? Perhaps pay for higher education or cover other non-home-related expenses? You could use the equity in your home to do a non-QM cash-out refinance. Depending on the situation, a homeowner could draw as much as 80% of the home’s value in cash.