I had the pleasure of training a few new Mortgage Planners yesterday in our office. One of the most interesting topics that was discussed was “Isn’t equity and stated income financing the same?” The answer is “NO”.
Let me explain.
Many institutional lenders (banks, credit unions, etc.) and all three mortgage insurers (CMHC, Genworth & AIG ) all offer some type of “stated income” program. On a conventional basis (no mortgage insurance needed) the lenders that have this type of program will normally do 65% loan-to-value, while on insured mortgages a client can get up to 95% loan-to-value. Not all lenders participate in the insured programs or to the full extent available.
“Stated income” programs are normally meant for clients who are self-employed or own their own businesses. Unlike salaried or wage earning clients, people who own their own business have opportunities to reduce their “taxable ” income via deductions and normal accounting methods. Self-employed people may appear to “earn less on paper”. This makes it potentially difficult for them to qualify for a mortgage under normal guidelines as their incomes may appear lower. A “stated income program” will allow these clients to just “SAY” how much they make, WITHOUT VERIFICATION, and qualifying would be based on that. The normal qualifying ratios must be in line based on the income stated.
Now before you all say “That sounds too easy” or “What if people lie?”
Obviously, we cannot stop people from lying but there is a “reasonableness test” that is applied. Is the income that was stated “reasonable” for the line of work or business? There are many income data stats available that can be accessed by the lenders and insurers to limit approvals to those who “fudge” their incomes. As well, the credit standards on these types of programs are higher than the average so though it may sound easy it is in reality not a “slam dunk”.
How does this compare to equity financing?
Most banks/financial institutions do not do equity financing. In equity financing the income does not matter. Also, it does not matter whether you are self-employed or not. It all depends on the amount of equity you have in the property. If there is a substantial amount of equity in the property you can be earning little or no income and still get the financing. The normal qualifying ratios do not apply. The loan-to-value you are able to obtain, and the interest rate charged, will depend on your credit history and the marketability of the property. The more attractive the property is and if it is in a desirable area you will be able to get a higher loan-to-value. A “shack” in the middle of nowhere will definitely not get as much financing and the rate charged will be higher. Or it may not be approved at all!
Equity financing is normally done by a few smaller institutional lenders, finance companies and private lenders.
I hope shows the differences between “Stated income” and “Equity” financing.