Stated Income Loans and No Income Verification Loans have been around for a long time and it is only in the past 6 or 7 years that they became a national phenomenon...and not in a good way. These loans were never meant for people who did not have impeccable credit, high credit scores, excellent assets and a solid employment record, but over the past several years it became an acceptable practice for far too many lenders and brokers to allow people with all types of employment and credit to obtain a stated or no income loan. Clearly, this was misguided and now we are all paying the price.

Stated income loans were created for the huge number of people who had all of the desirable qualities of good borrowers, but due to the nature of their business, business structure or allowable tax deductions were unable to qualify for a mortgage through Fannie Mae, Freddie Mac, the FHA or the VA.

In the past, banks and lenders only made these loans available to those whom they felt were truly qualfied, but in the last few years the growth of the secondary markets (where "pools" of mortgage backed securities are sold) enabled all lenders and mortgage brokers to offer various types of risky stated loans. As investor appetite for the returns offered by these loans increased, underwriting guidelines loosened and a lot of loans were made that should not have been made. The story is well documented now and, for the most part, common sense has returned to the mortgage market and the old rules for originating these loans now apply.

At this time, there are a few stated income loan programs available for the purchase or refinance of a principal residence or a second home, but only for the truly qualified using the new (old) rules. These loans are not sold on the secondary market, but instead held in a bank's portfolio. They are similar to the portfolio loans of old when a bank that was lending it's own money would have their "credit committee" evaluate each loan application.

The bank's that originate and purchase these loans feel they are getting a good return for the amount of risk involved since they underwrite these loans the same way they did before the secondary market for stated income loans existed. The underwriting is similar to a commercial loan in that the bank or lender is very concerned with the cash flow available to the borrower. If a borrower has a proven track record of excellent credit, significant assets, a successful business and an obvious capacity to repay the debt then they may be eligible for the loan.

It really boils down to common sense...and risk. And from a purely risk perspective there are many banks and lenders that are comfortable lending money to someone who may not be able to document income per secondary market guidelines, but who is self-employed with impeccable financial credentials, a substantial investment or equity position in the home and a proven capacity to handle the proposed mortgage payment.

When you consider that many traditional loan programs offered by Fannie Mae, Freddie Mac, the FHA and the VA allow borrowers to qualify with little to no traditional credit (or bad credit), very little time on the job and very little, if any, investment in the property you can see why lenders have historically made allowances when lending to the self employed.

John King of MyMortgageBanker.com specializes is helping the self employed and business owners obtain residential and commercial mortgage financing.