Alternative Loan Qualification Secrets

Alternative Loan Secrets

In the mortgage industry, the borrower has a good amount of requirements to meet in order to get a loan. Proof of income usually comes on top of the list. I mean, without it how does the lender expect the borrower to qualify for the loan? It is quite important for the borrower to have enough funds to actually make payments for the loan. However, things may run differently for stated income loans. Although it may sound too good to be true, there may be ways to get a loan without proof of income. This way is properly haled as the alternative loan documentation.

Alternative Documentation Loans

Usually, lenders ask borrowers to give them paystubs and W-2s as proof to qualify for a loan. Without such documentation, it is difficult to qualify unless of course the borrower is self-employed or perhaps works on commission. In instances such as those, the borrower can use alternative doc loans. Instead of providing the lender with paystubs or W-2s, the borrower gives the lender alternative documentation loans. These alternative documentation loans work for stated income loans as well.

Bank Statements

Majority of the time, bank statements count as alternative documents. The borrower just needs to have consistent proof of receiving income. So if the borrower makes $7,000 every two weeks, their bank statements show the regular deposits at the same time every other week. Furthermore, the lender uses that as proof for your gross monthly income. The lender sometimes even asks the borrower for their 12 month bank statements to see the regular deposit.

Alternative doc loans are good for self-employed people who make plenty of money. However, they also make a bunch of deductions from their tax returns. Because they write-off so many expenses, lenders must also deduct them from their incomes. They are required to use the borrower’s claimed income with the IRS. However, the deductions from the borrower’s income reduces the borrower’s qualifying income. In cases, it may reduce it so much that the borrower may not even qualify for the loan even if they make enough money.

Proof of Assets

While the borrower may have enough assets to cover their loan payments, sometimes they may not even have a job. In such cases, the lender will accept another alternative documentation loan—Asset Depletion Loan.

Under this alternative doc loan, the borrower need only delineate proof of assets. In other words, the lender asks the borrower for their 12 month investment statements and takes 70% of that investment amount. For instance, the borrower may have $300,000 in an investment. The lender would only use $210,000 for qualification. This amount must then also get the borrower through the life of the loan. So, if the borrower applies for a 15-year loan, they would be making a $1,167 monthly payment for 180 months. Also, if the borrower applies for a 30-year loan, they would be making a $583 loan for 360 months.

Credit Score

In general, the higher the credit score, the less risk the borrower poses. This applies to every loan. For stated income loans, every lender has a different requirement however. Hence, a lender may require a higher than 700 FICO credit score. Another may accept a score as low as 580. It is best for the borrower to shop around for lenders best suited to them. In addition, applying with several lenders never hurts. This way, the borrower can see the best offer at the best rate and term.

Improving the FICO Credit Score

Overall, it is best to have a higher credit score. Nevertheless, a potential borrower can start planning on improving their FICO credit score in the following ways:

  • Diversify the loans they carry
    • It’s important not the have all revolving credit or all installment loans
  • Make all their payments on time
    • Timely payments allow credit scores to go higher
  • Pay their loan balances down as much as they can
    • It’s best to pay off credit card balances
    • If can’t pay them off, aim for at most 30% of their available balance outstanding at one time

Other Caveats

Ultimately, the less payment shocks a borrower has, the more attractive of a borrower they look to a lender. As mentioned above, it is best to have a great credit score. This shows the lender that the borrower is not a high risk. In addition, it is also good to have the following:

  • Low Debt Ratio: It is great to have a low debt ratio. Nonetheless, just like the credit score, debt ratios may vary. In other words, one lender may want a loose debt ratio of 31/43. Another may want a tight one such as 28/36.
  • Asset Liquidity: Having a good number of liquid assets also makes the borrower seem less risk averse. Using the assets to qualify for the loan through asset liquidity does not necessarily count as a compensating factor.
  • Job Stability: Having a stable job looks like an attractive compensating factor for a lender. A job held for many years and a comparable stable housing payment makes it look less likely that the borrower will default on their loan.

In all, as long as the borrower can prove to the lender that they can afford and pay the loan out without difficulty, the more likely they are to receive the loan.

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