Everything You Need to Know About Stated Income Construction Loans

Construction loans allow buyers to finance the building of a new home or renovations to an existing property Unlike traditional mortgages, the funds are dispersed in stages during the construction process. While most construction loans require documented proof of income, stated income construction loans offer more flexibility

If you have a complex income structure as a business owner, self-employed individual, or someone with commission-based earnings, stated income construction loans allow you to qualify based on your overall financial picture rather than strict income documentation.

In this comprehensive guide. we’ll cover everything you need to know about stated income construction loans. including

What is a Stated Income Construction Loan?

With a stated income construction loan, you simply report your income on the loan application rather than providing tax returns or W-2s to strictly document it.

The lender then utilizes alternative verification methods to confirm your financial stability, such as:

• Analyzing bank statements to verify regular deposits and cash flow
• Reviewing your assets and investments to determine your net worth
• Considering factors like your credit score and down payment amount

Stated income construction loans cater to borrowers like entrepreneurs, gig workers, real estate investors, and other non-traditional income earners.

Key Benefits of Stated Income Construction Loans

Here are some of the biggest advantages these loans offer:

• Bypass income documentation hassles – No need to gather years of tax returns or financial statements. The streamlined application saves you major time and effort.

• Accommodate fluctuating or non-traditional incomes – Your income doesn’t have to fit neatly into a W-2 salary. These loans work for variable, seasonal, or unconventional earnings.

• Leverage your strong financial profile – Alternative verification methods allow you to qualify based on your robust assets, savings, or credit score rather than just your income.

• Build your dream home – Stated income construction loans finance major renovations or ground-up construction so you can build your ideal residence.

• Finance investment properties – These loans allow real estate investors to tap into construction financing for flips, new rentals, or multifamily projects.

How Do Stated Income Construction Loans Work?

Here is an overview of the process:

• You fill out a loan application stating your income, assets, credit profile, and other details.

• The lender analyzes your bank statements, investment accounts, and credit report for alternative income verification.

• Provided you meet the lender’s credit score, savings, and down payment requirements, you get approved for the loan.

• An appraisal is completed to determine the after-construction value of the property. This sets the maximum loan amount.

• You work with a construction lender to set up a construction loan disbursement schedule matching project stages.

• The lender disburses payments to the contractor as work is completed based on the inspection/draw schedule.

• Once construction is finished, the loan converts to permanent financing that you repay like a typical mortgage.

What Are the Requirements for Qualification?

While stated income construction loans are more flexible than conventional loans, you still need to meet certain requirements:

• Down payment – Expect to put 10-25% down. A substantial down payment helps mitigate risk.

• Credit score – Most lenders look for scores in the mid 600s and above. The higher your score, the better.

• Assets – Robust savings, investment accounts, and reserves boost your approval odds.

• Project viability – The project needs to appraise for more than construction costs and meet lending guidelines.

• Construction timeline – The project needs to be complete within 12 months in most cases.

• Loan-to-value limits – Your loan amount is capped at a percentage of total project costs based on your financials.

What Kinds of Properties Can You Build or Renovate?

Stated income construction loans work for a variety of real estate projects:

• Construct a single-family home from the ground up

• Renovate your current primary residence

• Build or remodel a vacation/second home

• Flip houses – finance construction for fix-and-flips

• Construct or rehab rental properties like duplexes and apartment buildings

• Add additions like new bedrooms, bathrooms, garages, or attic conversions

• Complete major overhauls like kitchen and bath remodels

The property just needs to meet the lender’s collateral requirements regarding location, condition, and appraised value.

What Are Typical Interest Rates and Down Payments?

Since they involve more risk for lenders, stated income construction loans often come with tradeoffs:

• Interest rates – Usually 0.5 to 1% higher than conventional construction loans.

• Down payments – Often fall between 15 to 25% of total project costs.

Still, for borrowers who have a solid financial profile but non-traditional income streams, slightly higher rates and down payments can be worthwhile to get approved.

What’s the Process of Getting a Stated Income Construction Loan?

If you’re considering a stated income construction loan, here is the general process:

1. Research lenders offering these alternative loans and choose one that fits your scenario.

2. Submit your loan application with income, employment, credit, and asset details. Provide bank statements to support income.

3. Get pre-approved to see potential loan amounts and terms based on your financial profile.

4. Once you have construction plans, the lender will order an appraisal to determine the after-construction value.

5. Work with the lender to set up the construction draw schedule and inspector for each stage.

6. The lender will disburse payments to your contractor as work is completed and inspected.

7. Once construction is finished, the loan converts to permanent financing that you’ll repay over a mortgage term.

Mistakes to Avoid with Stated Income Construction Loans

When applying for a stated income construction loan, be sure to avoid these key mistakes:

• Having large inconsistencies between income listed and bank statement deposits. Justifications will be required.

• Neglecting to have substantial assets and reserves to strengthen your application.

• Missing documentation such as business licenses if self-employed. CPAs letters confirming income may be needed.

• Purchasing a lot and starting construction before getting loan approval. This can disqualify you from financing.

• Taking on too ambitious of a project that can’t realistically be completed within typical construction loan timelines.

• Overestimating the after-construction value. Be conservative in your estimates during the planning phase.

Alternatives to Explore Beyond Stated Income Construction Loans

Stated income construction loans are not your only option. Here are a few other routes to consider:

• Business lines of credit – Tap into existing business credit lines to fund smaller renovations.

• Home equity loans – If you have sufficient home equity, a home equity loan or line of credit can provide renovation capital.

• 401K/IRA loans – You may be able to borrow against your retirement savings without tax penalties to finance construction.

• Asset-depletion loans – These loans look at total assets rather than income. Requires you to liquidate stocks, bonds, or CDs as you draw on the loan.

• Hard money loans – Asset-based loans from private lenders at higher rates/fees for short terms. Better for smaller projects.

• FHA 203(k) – Government-backed renovation/construction financing. More lenient credit and income requirements but lower loan amounts.

• Private money – Seek financing from private investors like friends, family, business partners, etc. if you have a solid relationship.

Partner With a Specialized Construction Loan Expert

Stated income construction loans remain a viable financing option in 2022 for borrowers with complex incomes. The key is finding an experienced construction lending specialist.

They will guide you in putting together a strong application, selecting the right loan products, and navigating the construction draw process.

Ready to turn your property dreams into reality? Let’s connect today to explore your stated income construction loan options!