Reduced Documentations Loans – Are they back?
Here is some excellent news about a new reduced documentation loan offered by our friend at Guaranteed Rate Mortgage..Nikitas Kouimanis.
Out Line For The Reduced Doc Product Also Known As The Stated Income Mortgage Loan
For more information about reduced documenation loans you can inquire with:
Nikitas Kouimanis, Guaranteed Rate Mortgage
The Reduced Doc Loan Program is for self-employed “business owners” only* buying or refinancing, including Cash-Out, their 1-4 family primary home or their one family or condo vacation home. Fixed, ARM or Interest only^^ products are available for this program. Debt to Income (DTI) should not exceed 38/44 with qualification based on using the fully amortized payment.
Maximum financing is:
All ARM Products
65LTV/CLTV up to $750,000 (1-4 Fam & Condo)
60LTV/CLTV from $750,100 to $1M (1-4 FAM & Condo)
50LTV/CLTV from $1,000,100 to $1.5MM (1-4 FAM & Condo)
50LTV/CLTV from $1,500,100 to $3M (1-2 FAM & Condo) All Fixed Rate Products 65LTV/CLTV up to $750,000 (1-4 FAM & Condo) 60LTV/CLTV from $750,100 to $1M (1-4 FAM & Condo) ^^2-4 family homes are excluded from the Interest Only products
Borrower must provide proof (such as a CPA letter) that they are a self-employed owner in an established business for at least two full years and their credit will be a major factor in the approval process.** The DTI ratios should not exceed 36/44 on the RDLP program (on a fully amortized basis.) The borrower must be the owner of an established business entity that can be independently verified by a CPA or some other means. 1099 Independent Contractors do not qualify for this program and often work for one or more businesses but may not actually own the business. Landlords are usually not considered self-employed business owners for this program. All rental income must be verified by leases. The Reduced Doc Program may be combined with a borrower (including him/her) that has a salary or other verifiable form of income on the same application. The S/E borrower states their income confirms business ownership and verifies their liquid asset and reserves are commensurate with the income stated on the application. The salaried borrower lists and verifies their income by traditional means such as W-2’s and pay stubs. The LTV and rates are based on the Reduced Doc Program.
Note: Qualify all Amortized and Interest Only ARM Products at the higher of the actual product rate or the start rate for the NJ 10/1 Amortized ARM
On all purchases the borrower must have the down payment, the closing costs and 12 months PITI reserves in seasoned personal, business or retirement accounts at time of application.
On all refinances the borrower must have the closing costs and 12 months PITI reserves in seasoned personal, business or retirement accounts at time of application.
For all purchases a minimum 35% down payment is required. Liquid and near liquid assets seasoned for two months including reserves must be commensurate with the type of business the borrower owns and the income stated on the application. Assets must be in the applicant’s personal accounts or jointly with any co-borrower to be considered. Assets shared with other family members may not be considered.
Any liquid or near liquid assets used for the transaction should be seasoned and verified with the last two months statements in domestic accounts. Foreign asset accounts are not acceptable.
Proceeds from the sale of a departing residence or other real estate are acceptable for the down payment. However, the reserves requirements should be in personal seasoned liquid accounts.
The minimum reserves for all Reduced Doc owner-occupied purchase and refinance transactions must be at least 12 months PITI. A second home requires an additional three months for a total of 15 months PITI. A non-traditional second
home requires an additional 6 months PITI for a total of 18 Months PITI.
Business assets for the transaction and reserves are acceptable if the borrower is 100% owner of the business and their company’s accountant confirms that personal use of the business funds will not adversely affect the business operations. In addition if business liquid assets are used they should be seasoned the same as personal assets and close attention will still be on the borrower’s personal liquid asset positions.
Gifts, including gifts of equity and a refinance of recently inherited property are acceptable if the borrower has at least 35% of the purchase price or the value of the inherited property plus closing costs and the necessary reserves in personal seasoned liquid funds.
Personal credit use and history are very important. Over extended use of credit will be a concern.
Although FICO scores are not used to evaluate any loan applications, a very strong credit profile including a satisfactory
rental reference or mortgage payment history is required and will be an important factor in the analysis of the loan request.
A strong mortgage payment history means no late payments past the grace period, usually the 15th of the month. This is important. Copies of canceled mortgage payment checks or a detailed mortgage payment history from the lender showing no payments were made past the grace period or late fees paid may be required as documented proof.
A Stated Income Loan is a mortgage where the lender does not verify the borrower’s income by looking at their pay stubs, W-2 (employee income) forms, income tax returns, or other records. Instead, borrowers are simply asked to state their income, and taken at their word.
Reasons For Stated Income Loans
These loans are nominally intended for self-employed borrowers, or other borrowers who might have difficulty documenting their income. Stated income loans have been extended to customers with a wide range of credit histories, including subprime borrowers. The lack of verification makes these loans particularly simple targets for fraud.
Stated income loans fill a gap of situations which normal loan standards would not approve. For example, a standard rule is that a customer’s mortgage and other loan payments should take up no more than 45% of the person’s income. This would seem prudent for a person just owning their main home. However, a real estate investor may have multiple properties and for each may receive only a small amount more than their loan payments on each house, but end up with $200,000 in disposable income. Nevertheless, a non-stated income loan would decline this person since their debt to income ratio would not be in line. The same issue can arise with self-employed borrowers, where the bank with a fully documented loan would include the borrower’s business debt in their debt to income calculation. Stated income loans also help borrowers where fully documented loans normally would not consider the source of income as being reliable and stable, such as investors who consistently earn capital gains. Fully documented loans also do not consider potential future income increases. Another type of loan that uses the same principles is the no income disclosure loan.
In August 2006, Steven Krystofiak, president of the Mortgage Brokers Association for Responsible Lending, in a statement at a Federal Reserve hearing on mortgage regulation, reported that his organization had compared a sample of 100 stated income mortgage applications to IRS records, and found almost 60% of the sampled loans had overstated their income by more than 50 percent.
U.S… Senator Chuck Schumer is currently leading an effort to restrict stated income loan; his Borrowers Protection Act of 2007 would essentially forbid them. A few years later, Chuck Shumer’s efforts came to fruition with the Dodd-Frank Financial Reform Bill HR4173. Within the Bill, Section 1411 has the following excerpt, “A creditor making a residential mortgage loan shall verify amounts of income or assets that such creditor relies on to determine repayment ability…” Currently, lenders are conducting their own version of income and asset verification.
Stated Income Loans are still offered typically by small local banks. Qualification requirements are based on stable employment, good reserves, good FICO and no less than 35% equity position in the property. Stated income loan availability changes state to state, county to county.
They are specifically for Self-employed borrowers only. We do have an investor that will lend to w2 employees but you need to have 50% equity in the home and the maximum loan amount is 1 million. Otherwise this type of loan is the loan of choice for self-employed people. If you are self-employed, it may be difficult to document a regular income. You might make a great deal of money one month only to follow it up with nothing the next. With a traditional lender, it is hard to convince them that you are a good risk. For self-employed people, it represents an opportunity to own a house without getting a regular job.
The pros of this loan are that you have a quicker application process – The process of getting your money is usually faster with a stated income loan. When you apply for a regular loan, they have to review the loan as well as verify everything about it with your employer and document it. With a stated income loan, they can skip this step and get on to lending you the money you need.
Make your own decisions – With a traditional loan banks try to make your financial decisions for you. They have many complicated ratios and formulas that they use to justify a loan amount for you. For example, if you are buying a duplex, they will only let you count a portion of the projected rental income in your income. However, with a stated income loan, you don’t have to worry about whether or not the bank thinks you can afford it. You see the monthly payment and you decide whether or not you can afford it.
The cons of this loan are higher interest rates – As a result of the hassle-free level of faith in you, you will usually be charged a higher interest rate. They are taking a bigger risk by extending this type of loan to you. Therefore, they want to be well compensated for the risk that they are taking. This means more money coming out of your pocket each month and over the life of the loan.
Higher chance of default – While they do not like to admit it, sometimes the bank actually does know what they are doing in the approval process. They have many statistics to back up their decisions to lend or not. When you use a stated income loan, you are eliminating all of these built-in protection mechanisms. When you show them your income, debts, and credit score, they are basing their decision to lend on the history of others in your situation.