What you ought to know (#13)

What is the difference between a "stated income" and "full documentation" loan?

The difference between a "stated income" and a "full doc" loan is simply how your gross monthly income is determined and verified in the mortgage application process.

With a stated income loan, your monthly income is just that...what you state it is. A stated income loan is available to all borrowers, but normally used by self-employed people. The income which you claim to earn must be reasonable for the type of business you own, or the position you have as a wage-earning employee (check: www.salary.com). Therefore, if you overstate what's acceptable, or reasonable to a lender for your position, you're likely to be turned down for your loan. Since the stated income approach asks that a lender basically "take your word for it", in terms of the amount of your income, there's a certain amount of risk to the lender in making these types of loans. Consequently, a stated income borrower will usually pay a higher interest rate than a borrower whose income can be fully documented by pay check stubs, W-2's, and sometimes... bank statements and income tax returns.

In some cases, it may be necessary for either a self-employed or salaried borrower to take the stated income approach; especially if the only income they can document or verify would prevent them for qualifying for a mortgage loan, because their debt-to-income ratio (DTI) exceeds the mortgage lender's allowable maximum percentage. If this is the case, a stated income loan may be your only option. But, for a less expensive loan, and for one that's easier to qualify for, the full doc approach to obtaining a mortgage is a better one. One caveat3;don´t lie on your application. If you can´t substantiate the income you state, don´t do it. Not only are there penalties for committing fraud on your application, but you might be getting yourself into a situation that you will be unable to repay the debt you are incurring.

Bottom-line...if you are unsure what approach is best for you, call us at Arrowhead Home Loans.

***If you have a question you´d like answered, please let me know.***