Banks have become more cautious these days and now extend financial assistance for buying a house only after you present a lot of paperwork to support your creditworthiness. Traditional home equity loan applications require records of mortgages and other loans on property, property documents, and proof of your income. But a particular type of home equity loans called stated income home equity loans are a ‘no doc or limited doc equity loan’ or ‘no income verification loan’. This type of home equity loan can be obtained without income statements.
A stated income home equity loan is very useful for consumers who are self employed or run a small businesses. It is also suitable for those who earn a commission based income. Such individuals have variable incomes that are hard to document, and they find it difficult to produce proper income statements to get loan sanctions.
For such individuals, several lenders offer ‘no proof of income’ programs. These programs are a boon for people whose incomes are not stated on a W2 form.
When you opt for a no income verification loan, you will have to state on the application that you do not have income statements. You need to fill in your monthly or yearly earnings and sign against it. This will serve as an income reference for your lender. You will also need a good credit score and should not have serious delinquencies on your credit history. If you work on a commission basis, you can request your employer for a wage summary. If you are an entrepreneur, keep a copy of your business license handy.
You may also need to provide documents of your tax returns. For a traditional home equity loan, your lender takes into account your taxable net income. In case of a stated income loan, you can use a gross income to qualify for it.
While processing your loan application, your lender is likely to take a close look at your debt to income ratio. The ratio between your income and mortgage payments should ideally stay within 36%. Anything higher than that can potentially disqualify you for a stated income equity loan.
A home equity loan, being a secured loan, normally carries a lower rate of interest. But stated income home equity loans are subject to slightly higher interest rates. Your lender may sanction the loan but he may doubt your ability to keep up with the monthly payments. To cover their risk, lenders charge you a little extra on your loan. The loan period is also usually shorter than the tenure of a conventional mortgage.
To get the best deal on a home equity loan, contact different lenders and compare their quotes. Always read the fine print because most home equity loans – conventional or stated income – carry prepayment penalties. Settle for a loan that gives you the best rates and most convenient repayment terms.