A stated-income loan program once allowed borrowers to qualify for mortgages simply by stating their income, without requiring pay stubs or tax returns. These “no-doc” or “low-doc” loans were popular among self-employed borrowers or others with complex income sources but became linked to risky lending practices that helped fuel the 2008 housing crash. Today, traditional stated-income loans no longer meet federal lending standards under the Ability-to-Repay (ATR) Rule, established by the Dodd-Frank Act and enforced by the Consumer Financial Protection Bureau (CFPB).
However, modern versions still exist, primarily as Non-Qualified Mortgages (Non-QM) with tighter documentation standards. The most common are bank statement loans where borrowers submit 12 to 24 months of personal or business bank statements for lenders to calculate income. This alternative verification suits freelancers, small business owners, and real estate investors whose income doesn’t fit into conventional pay stub or W-2 categories.
These loans generally require higher down payments, better credit scores—usually above 680—and often higher interest rates, reflecting the increased underwriting risk. Borrowers should also watch for possible prepayment penalties and must work with lenders experienced in Non-QM products to navigate the application process successfully.
For more on Non-Qualified Mortgages, see Non-QM Mortgage and to understand bank statement loans better, visit our article on Bank Statement Loan.
Key Features of Modern Stated-Income Loans vs. Traditional Loans
| Feature | Traditional Loan | Modern Stated-Income Loan (Bank Statement) |
|---|---|---|
| Income Verification | Pay stubs, W-2s, tax returns | 12-24 months bank statements, profit & loss reports |
| Borrower Type | Salaried employees | Self-employed, investors, business owners |
| Down Payment | 3-5% typical | 10-25% or more |
| Interest Rate | Lower market rates | Typically 0.5% to 2% higher |
| Credit Score | Flexible, sometimes lower | Usually minimum 680+ |
| Regulatory Status | Qualified Mortgage rules | Non-Qualified Mortgage (Non-QM) rules |
Important Considerations
- Income Verification: Fraudulent income claims are illegal and lenders verify bank statements carefully.
- Cost: Expect higher interest rates and possibly higher closing costs.
- Prepayment Penalties: Some Non-QM loans include penalties for early payoff—confirm before signing.
- Lender Expertise: Choose lenders familiar with Non-QM and bank statement loans for smoother approval.
Who Benefits Most?
These loans are ideal for those whose income is irregular or undocumented through typical pay channels: freelancers, contractors, entrepreneurs, and real estate investors.
FAQs
Are stated-income loans legal?
Modern stated-income loans with alternative documentation are legal and regulated. The original no-documentation loans are no longer allowed for owner-occupied mortgages under federal law.
Do I need a good credit score?
Yes, most lenders require a score above 680 due to the increased risk of alternative income verification.
Can I use these loans for my primary residence?
Yes. While often used for investment properties, qualified borrowers can use them to buy primary homes.
References
- Consumer Financial Protection Bureau, Ability-to-Repay and Qualified Mortgage Standards
- Investopedia, What Is a Stated Income Loan?
- Forbes, Bank Statement Loans: How They Work And Who They’re For
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