Stated income loan
A stated income loan is a mortgage where the lender does not verify the borrower's income by looking at their pay stubs, W-2 (employee income) forms, income tax returns, or other records. Instead, borrowers are simply asked to state their income, and taken at their word. These loans are sometimes called liar loans or liars' loans (often misspelled liar's loans).[1][2] Stated income loans were originated by Ameriquest.[3]
Contents |
[edit] Reasons for stated income loans
These loans are nominally intended for self-employed borrowers, or other borrowers who might have difficulty documenting their income. Stated income loans have been extended to customers with a wide range of credit histories, including subprime borrowers. The lack of verification makes these loans particularly simple targets for fraud.[4]
Stated income loans fill a gap of situations which normal loan standards would not approve. For example, a standard rule is that a customer's mortgage and other loan payments should take up no more than 45% of the person's income. This would seem prudent for a person just owning their main home. However, a real estate investor may have multiple properties and for each may receive only a small amount more than their loan payments on each house, but end up with $200,000 in disposable income. Nevertheless, a non-stated income loan would decline this person since their debt to income ratio would not be in line. The same issue can arise with self-employed borrowers, where the bank with a fully documented loan would include the borrower's business debt in their debt to income calculation. Stated income loans also help borrowers where fully documented loans normally would not consider the source of income as being reliable and stable, such as investors who consistently earn capital gains. Fully documented loans also do not consider potential future income increases.
In August 2006, Steven Krystofiak, president of the Mortgage Brokers Association for Responsible Lending, in a statement at a Federal Reserve hearing on mortgage regulation, reported that his organization had compared a sample of 100 stated income mortgage applications to IRS records, and found almost 60% of the sampled loans had overstated their income by more than 50 percent.[5]
U.S. Senator Chuck Schumer is currently leading an effort to restrict stated income loans;[6] his Borrowers Protection Act of 2007 would essentially forbid them.
Stated income loans are still offered typically by small local banks. Qualification requirements are based on stable employment, good reserves, good FICO and no less than 40% equity position in the property. Stated income loan availability changes state to state, county to county,[7].
[edit] References
- ^ The incorrect spelling liar's loans is often used even by financial experts. The correct plural is either liars' loans or liar loans, of which the corresponding correct singulars are liar's loan and liar loan.
- ^ [1] Agency Sounds Warning On Stated-Income And Interest-Only Mortgages, Realty Times, January 10, 2005
- ^ Paul Muolo and Mathew Padilla. Chain of Blame. John Wiley & Sons, 2008, 2010. p. 86. ISBN 978-0-470-55465-4.
- ^ 'Liar Loans' Contribute to Mortgage Problems, NPR, March 17, 2007
- ^ Steven Krystofiak, [2], statement at a Federal Reserve, August 1, 2006, cited in Mark Gimein, "Inside the Liar Loan: How the Mortgage Industry Nurtured Deceit", Slate Magazine, April 24, 2008
- ^ Jack Guttentag, Stated-income loans face new scrutiny", Seattle Times, April 25, 2007
- ^ Finance One Asset Management, [3], July 2011
[edit] Further reading
- Kenneth R. Harney, "As IRS Income Verification Gets Tighter, Other Issues Emerge", Washington Post, September 30, 2006
- Chris Isidore, "'Liar loans': Mortgage woes beyond subprime: Loans where borrowers gave little proof of income could be the next threat to the troubled real estate market - and the economy", CNNMoney.com, March 19, 2007
- E. Scott Reckard, "Defaults exposing truth of "liar's loans", Los Angeles Times, January 15, 2008
