Stated income loan
Encyclopedia
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 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). Stated income loans were originated by Ameriquest
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borrowers. The lack of verification makes these loans particularly simple targets for fraud
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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.
U.S. Senator
Chuck Schumer is currently leading an effort to restrict stated income loans; 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 then 40% equity position in the property. Stated income loan availability changes state to state, county to county,.
Ameriquest
ACC Capital Holdings was a national mortgage lender based in Orange, California. The company is the largest privately held retail mortgage lender in the United States and the largest subprime lender by volume...
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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 subprimeSubprime lending
In finance, subprime lending means making loans to people who may have difficulty maintaining the repayment schedule...
borrowers. The lack of verification makes these loans particularly simple targets for fraud
Fraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
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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.
U.S. Senator
United States Senate
The United States Senate is the upper house of the bicameral legislature of the United States, and together with the United States House of Representatives comprises the United States Congress. The composition and powers of the Senate are established in Article One of the U.S. Constitution. Each...
Chuck Schumer is currently leading an effort to restrict stated income loans; 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 then 40% equity position in the property. Stated income loan availability changes state to state, county to county,.
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
See also
- Alt-A mortgage
- William K. Black
- Late-2000s financial crisisLate-2000s financial crisisThe late-2000s financial crisis is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s...