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Stated income and limited doc mortgages are intended to make life easier for the borrower. While a lender
will require lots of documentation for a traditional loan - like copies of pay stubs, recent tax returns and
bank statements - there is another type of loan, requiring very little substantiating paperwork. With a
stated income and limited doc mortgage, the bank simply believes your claims. The bank accepts your claims
of assets, income and debt without further
investigation. As a result, you will not have to hunt down your tax return and W-2 before going to the bank.
The lender assumes a higher degree of risk with this program. The additional risk results from the fact that
the bank simply takes you at your word. If you have not been completely honest - or if your financial
situation changes - the bank could be exposed to the risk of financial loss. To protect themselves, mortgage
lenders charge higher interest rates. The higher interest rate makes it possible for the
bank to extend a riskier loan, and the applicant will be able to get a mortgage, despite the higher risk.
These loans are not for everybody. In fact, stated income and limited doc mortgages are most appropriate for
people who derive a significant portion (or all) of their income from self-employment. People who are
self-employed don't receive W-2s; many do not give themselves pay stubs. So, they have no documentation to
take to the bank. They could bring financial statements from the business to substantiate their claims, but
few self-employed people bother to create them. A stated income mortgage makes the process easier. A
applicant who is self-employed does not have to bring anything to the bank. All he has to do is tell the
lender about his income,
assets and debt. By charging a higher rate of interest on the mortgage, the bank can afford to believe him.
It doesn't pay to lie on a application. Even if the bank simply accepts your claims, you still have to repay
the mortgage. If you cannot afford to make the payments, you could wind up in default, costing you your home
and your credit rating. Since the bank accepts your claims, you have to be the judge of what you can afford.
Be careful. When applying for a
stated income and limited doc mortgage, don't get greedy. Only borrow what you know you can afford to repay.
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