The Self-Employed Borrower and the Stated Income
Kenji is a mortgage agent reviewing an application from Ava, a sole proprietor who runs a landscaping business. Ava reports $140,000 in annual income on her application. Her Notice of Assessment shows $62,000 in net income after business expenses and deductions. Ava explains the gap: 'My accountant writes off everything - truck, fuel, tools, home office. My real cash flow is $140,000. Just use stated income, everyone does it.' Ava has 20% down and a 720 credit score. The lender Kenji is considering offers a stated-income product but requires a signed borrower declaration that the stated figure is accurate and verifiable. Kenji's commission on the file is $4,800, and Ava has hinted she will walk if he 'makes it complicated.'
1. Assess whether Kenji can submit the $140,000 stated income. What are the risks and what should he do?
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The core issue: stated income is not a licence to state an aspirational figure. The lender's declaration requires the figure to be accurate and verifiable. Ava's $140,000 is gross business revenue before expenses - not income available to service a mortgage. Her verifiable net income is $62,000 per the NOA. Submitting $140,000 would be a misrepresentation on a signed declaration, exposing Kenji to fraud allegations, lender recourse, and licence discipline.
Ava's argument is partly right but legally irrelevant. Cash flow and write-offs do matter to a lender's affordability analysis, but the mechanism is add-backs documented by the accountant (e.g., depreciation, business-use-of-home), not a unilateral restatement. If legitimate add-backs raise qualifying income, Kenji should obtain an accountant's letter or financial statements supporting the adjusted figure - and submit that documented number, not $140,000.
The commission pressure is irrelevant to the analysis. A $4,800 commission does not change what is verifiable.
Action: Kenji should decline to submit $140,000 as stated income, explain why, request accountant-prepared statements and add-back documentation, and submit the supportable figure. If Ava walks, that is the correct outcome.
2. If Ava insists on the higher figure, what should Kenji document and communicate, and what alternatives exist?
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Documentation: Kenji should record the conversation - the income discrepancy, his explanation of why the stated figure cannot be used, the alternatives offered, and Ava's response. A written follow-up email is prudent: 'As discussed, your NOA shows $62,000 net; we can qualify on a documented add-back figure or explore alternative products.'
Communication: He should be direct that submitting an unsupported figure would be a misrepresentation he cannot make, and that it would harm her too (potential lender recall, default, or fraud finding).
Alternatives:
- Documented add-backs: accountant letter supporting a higher qualifying income.
- Alternative lenders with stated-income or bank-statement programs that have their own verification rules - but the stated figure must still be supportable under that program's terms.
- Co-borrower or reduced purchase price to fit the verified income.
- Different product (e.g., a program using business bank statements) that legitimately captures cash flow.
If none work, Kenji should decline the file. Protecting the client from a fraudulent application is part of the service, not an obstacle to it.