Refinance Advice

Stated Vs. Full Documentation

Oftentimes self-employed people are put in a dilemma when purchasing a loan. Their income throughout the year is higher than the amount of money that they declare on their income taxes. This is because most self-employed people have legal deductions that they claim, thereby lowering their tax burden.

Since the income of a self-employed person is determined by their net annual income, they sometimes will be rejected when applying for a loan because of a key element in the loan approval process known as the debt to income ratio. If the amount of your monthly debt is more than 45% of the income that you earn, you will oftentimes be rejected. Lenders like to know that you are spending less than 45% of your income on your basic monthly payments. These payments include your principal and interest on the loan, your property taxes and homeowner's insurance, car payments, credit card payments and any other installment loan payments.

For example if you have $2,000 worth of monthly payments and earn $60,000 per year ($5,000 per month) your debt to income ratio would be 40%. However if after tax deductions your net income is reduced to $45,000 ($3,750) per month then your debt to income ratio would be 53% and your loan could be rejected.

The good news is that banks and lending institutions understand this and have created a method for this type of borrower to qualify. Under these circumstances, the bank is willing to let you state your income. This monthly income amount can be any amount as long as it is a reasonable amount for the type of work that you do. For example, if we state $5,000 as our income we would qualify for the loan, and since $5,000 is a reasonable income for the type of work, it would be accepted.

However, in order to qualify for a stated income loan, your credit must be in very good standing. If you credit score exceeds 680 then you can receive the best rates available under the stated income program. This rate is always slightly higher than the rates of a full income documentation loan, but usually only by .25% to .375%. The privilege of stating your income does come at a small price.

If your credit score is below 680, then a stated income loan is still possible at an even higher interest rate. The lower your credit score, the higher the interest rate will be. Credit scores below 620 could cause problems with qualifying and other restrictions could apply.