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Ins and Outs of Stated Income Home Equity Loans

Self-employed consumers looking to access the equity that has built up in their homes – whether for investment purposes, to access capital for their small business enterprise, or merely to consolidate debts at a lower interest rate– quickly run into the sometime perplexing requirements to qualify for a stated income home equity loan. Unlike borrowers who are otherwise employed and can provide lenders with pay slips that readily set out their income stream, small business owners, entrepeneurs and commission-based salespersons face a slightly more daunting process in qualifying for a second mortgage or secured line of credit that will free up their home equity.

Stated income home equity loans are structured to assist self-employed consumers and business owners overcome the difficulty of meeting the regular mortgage approval criteria that banks, financial institutions and mortgage lenders look to. Perhaps thekey for the self-employed individual seeking to qualify for a home equity loan or secured line of credit process is the self-employed business persons debt service ratio.

Whereas consumers with a fixed employment income have relatively few business write-offs, the self-employed have a myriad of legitimate tax write-offs that affect their income stream. Lenders accordingly want to look at the revenue stream that the self-employed have to service their existing debt load. Mortgage lenders each have a set debt service ratio – a threshold that the ratio of monthly income to expenses (including mortgage and loan payments) – which cannot be exceeded in order to qualify for a stated income loan. Proving one’s income stream and qualifiying a stated income mortgage under a lender’s DSR is a more complicated process than qualifying for a regular mortgage but need not be prohibitive.

Additionally, even consumers with a fixed salary or other income stream may have additional business income that could qualify them for either additional home equity funds or better lending rates than those they would qualify for based solely on their income from employment. In today’s economy it is more and more common for borrowers to have multiple income streams. Working with a mortgage broker can help a borrower leverage all his or her income streams in seeking home equity financing or a secured line of credit.

The simplest method for accessing a stated income home equity loan is to work with a qualified mortgage broker who will be able to access varied lenders and pools of capital that may not otherwise be available to the individual consumer. A mortgage broker can help a self-employed small business owner, entrepreneur or commissioned salesperson access:

- 2nd mortgage financing worth up to 100% of home equity with documented income

- 2nd mortgage financing or a secured line of credit worth up to 85% of home equity without proof of income necessarily being required; and

- Equity Based / Private second mortgage financing up to 90% of available home equity.

When an individual who is self-employed applies for credit under traditional, full documentation guidelines, because their reported income and DSR is great enough to qualify under normal lending guidelines, they are often asked for documentation that shows their income has consistently been at this level for a number of years. Working with a knowledgeable mortgage broker in securing a stated income home equity is particularly helpful for self-employed individuals whose documented income steam has a history of variability, and is often more productive than attempting to clear the separate lending thresholds of institutional lenders on an individual basis. An experienced broker, who is after all self-employed in most instances, can help a person who is self-employed clear lending barriers and financial thresholds that might otherwise seem insurmountable in trying to secure a home equity loan based on stated income.

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For more information on stated income home equity loans and home equity loans in general contact CanadianMortgagesInc.ca