Connect with us

Bad Credit

Stated Income Loans Wrecked the Housing Market in 2008. Here’s Why They’re Safe in 2021



Learn what a stated income loan is and who might benefit from using one.

Stated income loans were a primary cause of the collapse of the U.S. housing market and subsequent Great Recession. They are making a comeback, but with major changes. If you’re self-employed or own a business, a stated income loan may be a good mortgage choice.

We spoke to Steven Schnall, CEO of Quontic Bank — a lender that says it specializes in serving the underdog — to understand why these loans are now a safe bet.

Why stated income loans needed a facelift

A stated income loan is just what it sounds like, a mortgage based on your stated (not verified) income. Prior to the housing bust, this type of home loan was abused to excess.

“Stated and no-income loans were used by salaried and self-employed borrowers, speculators, flippers, buyers with poor credit or no credit, and scammers,” says Schnall. Lenders didn’t verify employment, income, or assets, and borrowers could get mortgages for amounts they had no way of paying back.

Why Better Mortgage scored a coveted 5-star rating from our experts

Why Better Mortgage scored a coveted 5-star rating from our experts

This is one of the top lenders we’ve used personally to secure big savings. No commissions, no origination fee, low rates. Get a loan estimate instantly!

Learn More

Some stated income loans allowed people to borrow a large percentage of the home’s value. As much as 125%, in fact. When borrowers owe more than the property is worth, they have negative equity. They may feel trapped — unable to sell or refinance — and are more likely to default on their loans.

“Wall Street kept lowering the bar,” says Schnall. He explained that since the loans were saleable on the secondary market, there was little incentive to tighten lending guidelines. The real estate world saw a rush to buy and home prices rose at lightning speed.

It’s easy to see why the stated income loan was a recipe for disaster and the name carries a stigma now. Eventually, these mortgages became associated with massive default rates and the entire housing bust.

Many borrowers can’t get a traditional mortgage

After the housing market crash, the government passed the Dodd-Frank Act with strict controls on who could qualify for a mortgage. It created a new, safer class of mortgage called the qualified mortgage, or QM.

One of the main features of a QM is that the lender verifies the borrower’s ability to repay the loan via tax returns and W2s or 1099s. This requirement shut many people out of home loans.

Here are two examples.

There are as many as 25.5 million self-employed U.S. taxpayers, according to Pew Research. Schnall says they often don’t qualify under Dodd-Frank rules because they can’t document their income the way a QM requires. This is not necessarily because a self-employed borrower is financially unsuccessful. It could be because they minimize their taxable income by maximizing their legal deductions. Or perhaps they invested in the business and show a loss on last year’s tax return.

Investment property buyers can also struggle to document sufficient income. Some real estate investors know they’ll be able to cover the mortgage payment with the rent received on the property. But they may not be able to show enough income on their tax return to qualify for the loan, especially if they already have one or more home loans.

The stated income loan today

Today’s stated income loans are a far cry from the risky loans of the 2000s. Indeed, Schnall says default rates for well-underwritten stated income loans are very low.

To approve a home loan application, the underwriter looks at four main factors: borrower’s income, LTV, credit score, and liquidity. Loan-to-value or LTV is the amount you borrow against the value of the property.

“If you take away any one of those four legs, you need strength in the other three,” says Schnall. Cash reserves can often be satisfied by the loan itself. As such, a borrower can qualify for a mortgage with a good credit score and significant equity.

Schnall says he took a deep dive into historical loan performance data pre-recession and found a default rate under 2% for loans where there was low LTV and a high credit score. Industry research bears this out. According to the Urban Institute, low LTV and good credit are the strongest indicators of mortgage creditworthiness.

“Skin in the game and good credit are strong indicators that you will be able to make your mortgage payments,” Schnall explains. “In 10 years we have never suffered a loss on a residential mortgage.”

Who should consider a stated income loan?

A stated income loan, also called an alt-doc loan, is just one type of non-QM home loan on the market for borrowers who need broader mortgage options.

Stated income loans are a good option for homebuyers who have cash or equity, but might struggle to document sufficient income to qualify for a traditional mortgage. For example, small business owners, gig workers, and people with fluctuating incomes.

Unlike qualified mortgages, which rely on documented income and set debt-to-income (DTI) limits, stated income loans rely on equity and credit scores. The stated income mortgage program is not a low down payment loan or a mortgage for bad credit. A first-time homebuyer looking for low barriers to homeownership may be better suited to other options, like an FHA loan.

A stated income loan does come with a couple of trade-offs compared to qualified mortgages. The most obvious is the high down payment requirement. The other is that even for borrowers with excellent credit, the mortgage rate on a stated income loan is higher than on a qualified mortgage.

Is a stated income loan safe?

Lenders have dropped the risky loan features that were common prior to the housing bust. And borrowers with low LTVs and high credit scores are unlikely to default. As such, this type of mortgage can be good for both the borrower and the lender. “Even through COVID,” says Schnall, “our borrowers have performed.”

The Consumer Finance Protection Bureau (CFPB) is on board, too. The CFPB is the watchdog agency that protects consumers from unfair, deceptive, and abusive financial practices. Its guidance points out that even if a loan is not a QM, it can still be an appropriate loan.

Source link

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Bad Credit

Loans Bad Credit Online – Loans Bad Credit Online – Reforming India’s deposit insurance scheme | Fintech Zoom | Fintech Zoom



Loans Bad Credit Online – Loans Bad Credit Online – Reforming India’s deposit insurance scheme | Fintech Zoom

Loans Bad Credit Online – Loans Bad Credit Online – Reforming India’s deposit insurance scheme | Fintech Zoom

Source link

Continue Reading

Bad Credit

Loans Bad Credit Online – Reforming India’s deposit insurance scheme | Fintech Zoom



The government’s incentive to step in and bail out depositors when banks fail is clear from past experience.

By Anusha Chari & Amiyatosh Purnanandam

The failure of the Punjab and Maharashtra Co-operative Bank (PMC) in September 2019 shone a light on the limitations of India’s deposit insurance system. With over Rs 11,000 crore in deposits, PMC bank was one of the largest co-op banks. That the Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance covered depositors, provided little solace when the realisation hit that the insurance amounted to a mere Rs 1 lakh per deposit.

The predicament of PMC depositors is, unfortunately, not an anomaly. Several bank failures over the years have severely strained RBI and central government resources. While co-operative banks account for a predominant share of failures, other prime examples include the Global Trust Bank and Yes Bank failures. These failures entail a direct cost to the taxpayer—the DICGC payment or a government bailout. More importantly, bank failures impose long-term indirect costs. They erode depositor confidence and threaten financial stability, presenting an urgent need for deposit insurance reform in the country.

A sound deposit insurance system requires balancing two opposing forces: maintaining depositor confidence while minimising deposit insurance’s direct and indirect costs. At one extreme, the regulator can insure all the deposits, which will undoubtedly strengthen depositor confidence. But such a system would be very expensive.

A bank with full deposit insurance has minimal incentive to be prudent while making loans. Taxpayers bear the losses in the eventuality that risky loans go bad. Depositors also have little incentive to be careful. They can simply make deposits in the banks offering high interest rates regardless of the risks these banks take on the lending side.

Boosting depositor confidence and reducing direct and indirect costs require careful structuring of both the quantity and pricing of deposit insurance. Some relatively quick and straightforward fixes could help alleviate the public’s mistrust while improving the deposit insurance framework’s efficiency.

India has made some progress on this front over the last couple of years. First, the insurance limit increased to `5 lakh in 2020. Second, the 2021 Union Budget amended the DICGC Act of 1961, allowing the immediate withdrawal of insured deposits without waiting for complete resolution. These are very welcome moves. Several additional steps could bring India’s deposit insurance system in line with best practices around the world. Even with the increased coverage limit, India remains an outlier, as the accompanying graphic shows.

The government’s incentive to step in and bail out depositors when banks fail is clear from past experience. However, these ex-post bailouts are costly. The bailout process also tends to be long, complicated, and uncertain, further eroding depositor confidence in the banking system. A better alternative would be to increase the deposit insurance limit substantially and, at the same time, charge the insured banks a risk-based premium for this insurance. Under the current flat-fee based system, the SBI pays144 the same premium to the DICGC—12 paise per 100 rupees of insured deposits—as does any other bank!

A risk-based approach will achieve two objectives. First, it will ensure that the deposit insurance fund of the DICGC has sufficient funds to make quick and timely repayments to depositors. Second, the risk-based premia will curb excessive risk-taking by banks, given that they will be required to pay a higher cost for taking on risk.

India is not alone in trying to address the issue of improving the efficiency of deposit insurance. The Federal Deposit Insurance Corporation (FDIC) recognizes that the regulatory framework governing deposit insurance is far from perfect and the United States is moving towards risk-based premia. The concept is similar to pricing car insurance premia according to the risk profile of the driver. The FDIC computes deposit insurance premia based on factors such as the bank’s capital position, asset quality, earnings, liquidity positions, and the types of deposits.

In India, too, banks can be placed into buckets or tiers along these different dimensions. The deposit premium can depend on these factors. It is easy to see that a bank with a worsening capital position and a high NPA ratio should pay a higher deposit insurance premium than a well-capitalized bank with a healthy lending portfolio. The idea is not dissimilar to a risky driver paying more for car insurance than a safe driver.

Risk-sensitive pricing can go hand-in-hand with the increase in the insured deposit coverage limits bringing India in line with its emerging market peers. In a credit-hungry country like India, these moves would build depositor confidence, possibly increasing the volume of deposits and achieving the happy result of the banking system channeling more savings to productive use.

Chari is professor of economics and finance, and director of the Modern Indian Studies Initiative, University of North Carolina at Chapel Hill and Purnanandam is the Michael Stark Professor of Finance at the Ross School of Business, University of Michigan

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Source link

Continue Reading

Bad Credit

5 Signs You’re Not Ready to Own a Home, According to a CFP



If you buy through our links, we may earn money from affiliate partners. Learn more.

The housing market has boomed over the last year, despite a global pandemic and millions of Americans struggling to make ends meet. 

Many people are spending less on entertainment, clothing, travel, and other discretionary purchases during COVID. Federal student loan borrowers have seen temporary relief from their loan payments. These expenses will most likely rise again after the pandemic, and many people who committed to a new home with a large mortgage will struggle to keep up. 

I often speak with clients and prospective clients who want to buy a home before they have a strong financial foundation. Buying a home is not only one of the largest purchases you’ll make in your lifetime, but it’s also a huge commitment that’s extremely hard to undo if you have buyer’s remorse

It’s important to make a thoughtful, informed decision when it comes to a home purchase. Before you take the plunge into homeownership, check for these signs that you’re not quite ready to buy. 

1. You have credit card debt

Credit card debt can be a drain on your monthly budget, and when combined with student loans and a car loan, it can lead to high levels of stress. 

Generally, more debt means higher fixed expenses and little opportunity to save for long-term financial goals. Your financial situation will only get worse with the addition of a mortgage. I always recommend that clients be free of credit card or other high-interest debt before they consider buying a home. 

To rid yourself of credit card debt, take some time to get a good handle on your cash flow. Take an inventory of your spending over the last six to 12 months and see where you can cut back. From there, develop a realistic budget that includes aggressive payments to your credit cards. 

There are several strategies to help you knock out credit card debt fast. Regardless of the method you choose, stick with the plan and track your progress along the way. Once you pay off your credit cards, you can allocate your debt payments to savings, which can help you avoid this situation in the future.  

2. You have bad credit

Bad credit is not only a sign that you may not be ready to take on a mortgage, it can also signal a high risk to

mortgage lenders
. A high-risk status results in higher interest rates and more strict requirements to qualify for a loan. A mortgage is one of the largest loans you’ll take out in your lifetime, and if you get behind on payments, you could lose your home. 

Just as with credit card debt, bad credit could be a result of past financial mistakes. Dedicating the time to repair bad credit and improve your credit score will help you beyond purchasing your dream home. 

Start by pulling a recent credit report from each of the three credit bureaus so you can review it for errors. Dispute any errors, address past-due accounts, and bring your overall debt balances down. It’s helpful to learn what has a negative effect on your credit score so you can avoid these mistakes in the future. 

3. You don’t have an emergency fund (or an inadequate one)

If you’re unable to save for a rainy day, you probably don’t have enough money to buy a house. Owning a home is a big responsibility, and unexpected expenses pop up all the time. In addition, you could lose your job, have a medical emergency, or another unexpected expense unrelated to the home. Maintaining an emergency fund is a good sign that you have discipline and are prepared for the responsibility of homeownership.

Many financial experts recommend saving at least six months of living expenses in an emergency fund. If you have variable income, own a business, or own a house, you should save more. To build an emergency fund, set money aside from each paycheck and automate transfers to make the process easier. Give your emergency fund a boost when you receive lump sums such as bonuses or tax refunds. Start by saving one month of living expenses and build from there. 

4. You don’t have separate savings for your home

I always advise clients to set aside savings for a home in addition to an emergency fund. It’s a bad idea to start homeownership with no savings. Whether you have unexpected expenses related or unrelated to the home, having no emergency fund after a home purchase will lead to unnecessary stress — and possibly more debt. 

When purchasing a home, you’re responsible for a down payment and closing costs. While a 20% down payment is ideal to avoid private mortgage insurance, a down payment of at least 3.5% is typically required. Closing costs can range from 2 to 5% of the home’s value. 

Also, you will have moving costs, costs to spruce up your new place (like new furniture or light cosmetic updates), and any initial maintenance and repairs. Be sure to budget for these items to know how much to save on top of your emergency fund. It doesn’t hurt to boost your emergency fund, too, in preparation for homeownership. 

5. You have a low savings rate

It’s much easier to develop good savings habits before you have a lot of responsibilities. To get on track for financial independence, several studies show that you should save at least 15% of your income. The longer you wait, the more you’ll need to save. 

If your savings rate is low before you purchase a home, it will most likely worsen after becoming a homeowner. Even if your mortgage is similar to your rent, ongoing maintenance and repairs, higher utilities, and homeowners association fees can wreak havoc on your budget. 

Take a look at your current savings rate and see if you’re on track for financial independence. If you’re saving less than 15 to 20% of your income, work to improve your savings rate before you consider buying a home. A strong savings habit can help you build your home savings fund faster and ensure that a home purchase doesn’t impede your long-term financial goals. Finally, understand how much house you can afford so you can avoid being house poor. 

Buying a home can be rewarding, and when done the right way, it’s a way to build wealth. Before you decide to buy a home, it’s important to understand your numbers and ensure that you’re ready for the commitment. Without preparation, your dream home could be detrimental to your long-term financial goals.

Chloe A. Moore, CFP, is the founder of Financial Staples, a virtual, fee-only financial planning firm based in Atlanta, Georgia and serving clients nationwide.

Source link

Continue Reading