Hello, and thank you for joining me. My name is Fernando Zoota and I am your host for the podcast and blog, Non-QM Insider, the show where we talk about regulations, guidelines and anything having to do with non-qualified mortgages. Today’s topic of discussion is stated loans.
First, let’s start by defining what a stated loan is. A stated loan was a loan where the borrower’s stated their income on the 1003 mortgage application. You would see, as an example, “I clean homes and I make $8,000 a month”. The income statement was unverified as long as the claim was “reasonable.” Here’s another example, “I’m an accountant in Beverly Hills. I make $30,000 a month.” As long as the statement seemed reasonable, (there’s the operative word, “reasonable”) a lender offering a stated loan program accepted the claim. They did not verify the income. Hindsight is 2020, with that said, in the late 1990’s, early 2000, it was different. Lending was done on the assumption that home values would continue to rise. As long as somebody was making the payment, then the property values were most likely going up. Every day the lender strengthened its equity position. They did things differently back then, that in retrospect, you slap the palm of your hand against your head and say “Boy, that was really dumb.” Additionally, analysts, politicians, and industry leaders initially proclaimed this was positive for communities. They later came back sounding the alarm to say this was negative and they knew all along. They call those individuals experts.
“The stated loan, as it’s historically been, is nonexistent.”
So, you’ve been tricked. I said this was going to be about stated loans. And now I’m telling you that stated loans don’t exist. I felt it was worth talking about because I get that question probably every day because veteran mortgage professionals are familiar with the term. I’ll receive a phone call asking if I can provide a stated loan for a borrower buying a primary residence. I respond by asking, “what are you trying to accomplish and why do you think we need to go stated?” Once I have all the information, I can determine if we can offer a loan and what the requirements will be. Most of the time we can offer a loan by providing bank statements for income. The solution is never stating your income on the 1003 application because that doesn’t exist.
“The reason stated loans don’t exist is because of the ATR rule under the Dodd-Frank Wall Street Reform Act.”
This isn’t a blog about the ATR rule. If you want to know more about ATR you can visit, the website, non-qminsider.com and the rule has it’s own blog. Briefly though, in today’s lending environment, a lender must make a reasonable good faith effort to determine that the borrower or the applicant has the ability to pay back the loan. The rule’s name is Ability to Repay. Stating your income and the ATR rule, they just don’t mesh at all. Because of that reason, there are no stated loans specifically for a primary residence.
What about non-owner occupied properties? Properties you plan on renting out or leasing? Well, that’s a little bit different because a non-owner occupied property can be a business purpose loan, a loan primarily for business purposes. This is an exception under the Truth in Lending Act. For the most part, there’s still no stated loans. By that I mean you don’t state your income in the income section of the 1003 mortgage loan application. Oftentimes, most lenders will just want the section left blank. Instead, the property qualifies on its ability to cash flow. If it’s a purchase, you will order a rent survey from the appraiser and he/she will say this property can get $2,000 in rent, and your PITI (principle, interest, taxes & insurance) is $2,000. You have a one to one coverage ratio and your property qualifies. That’s referred to as the Debt Service Coverage Ratio (DSCR). The ratio is one to one, if you’re leasing it out for the same amount that you’re getting in rent.
“Today, the DSCR program is what most mortgage or real estate professionals are referring to when asking for a stated loan.”
Generally, your property needs to cash flow in order to qualify for a DSCR program. However, most lenders will consider properties that don’t cash flow. This may be true if you’re buying a home in an area you believe will rise in value. Another example may be when a loved one is living in the property. They can only afford $X, and as the property owner you will cover the rest. There’s typically an additional hit to the interest rate for being underwater every month. If you don’t have a reason for being underwater every month, the underwriter is going to ask questions. It’s not going to make sense. Why am I gonna lose $1,000 a month? You better have a really good reason if your property doesn’t cash flow.
For the purposes of this blog, stated loans don’t exist for primary residence and for investment properties, it’s called DSCR.