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Pros and Cons of Stated Income Loans


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TERMINOLOGY

Stated income loans are loans that do not require pay stubs or income tax returns to verify salary history. You simply fill out the application, the bank processes it and decides whether or not to loan you money. A stated income loan comes with several pros and cons associated with it. Here are a few things to consider:

Pros

  • Self-employed loans - 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.
  • 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.

Cons

  • Higher interest - 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. If they do not think you can handle the obligation, then you might want to listen to them. With stated income loans, you negate that opportunity and can sometimes get in over your head.