Conventional loans available for self-employed borrowers

Mary Worm is a loan officer for Farris Mortgage in Springfield.

Qualifying for a home loan doesn't have to be difficult just because a borrower can't verify an acceptable amount of income.

If a borrower is self-employed, on commission or derives income from sources other than a salaried job, it may be difficult to gather all the paperwork needed for a traditional loan application.

With stated income mortgage loans, borrowers just need to "state" their income. Excellent credit history and a strong asset base can qualify a borrower for most traditional fixed or adjustable rate mortgage loan programs.

A borrower can benefit from the reduced documentation that a stated income program provides. In most cases, no tax returns, W2s, pay stubs or verifications of employment are required. The fundamental thing to keep in mind is that a borrower has options. By evaluating income, assets and employment, a loan officer can decide which program is right for each individual borrower.

A stated income mortgage generally asks the borrower to state his or her income on the mortgage application. Although proof of this income is generally not verified, the "stated income" must appear to be reasonable for the profession stated on the mortgage application, and the borrower must still qualify for all of his or her payments, including the mortgage payment, car loans, students loans, other installment loans and credit card payments according to the debt-to-income guidelines for the mortgage program. If the borrower is self-employed, there is generally a requirement of two years of self-employment.

There are many variations of the stated income mortgage. Some require the submission of tax returns, although the income is not used to qualify the borrower, and others require the submission of 12 months of bank statements to verify cash flows. Generally, the higher the loan-to-value ratio the borrower is trying to obtain and the less documentation required, the higher the interest rates and closing costs. The more documentation the borrower is able to supply and the more equity that can be put into, or left in the property, the lower the interest rate and closing costs.

No-ratio mortgages generally do not require the borrower to state any income on the mortgage application. In this instance, since income is not asked for, no debt ratio is calculated. Generally no income documentation is asked for. Interest rates are slightly higher than in stated income mortgages, and loan-to-value ratios are generally lower.

In qualifying for these loans, the lender will not require a borrower to provide standard explanations of income, such as tax returns.

This means that there is no verification of income, but the borrower must state the source of the income.

Individuals likely to be interested in a stated income loan are typically self-employed or individuals, who write-off a large portion of their income such as contractors, waiters and waitresses.

If a borrower can verify that he has good credit and can verify employment or self-employment for two years, then he may qualify for a stated income loan. "Good credit" is defined as credit good enough that the borrower would typically qualify for conventional financing.

There are many versions of no-income verification loans (sometimes called stated income loans) available in the mortgage marketplace.

The ironic thing is that many successful self-employed individuals actually have better cash flow than salaried borrowers and are sometimes better able to handle a monthly mortgage payment.

Self-employed borrowers do pay a premium for the privilege of not verifying income.

How much of a premium depends on the usual factors: credit scores, assets, etc. Additionally, if a borrower is willing to consider a loan that is fixed for three or less years before it adjusts, a borrower may actually be able to get better financing than a neighbor with W2s.

If a borrower has the credit and can prove employment or self-employment for the requisite two years, then he should be able to get attractive mortgage financing without a hassle.