What’s a stated income loan?
A stated income loan qualifies a borrower using the income the borrower states on the application form â€“ as opposed to the income the borrower can document. With a stated income loan, the lender agrees not to attempt to verify the income the borrower states on the application.
Stated income loans are designed for the many prospective home buyers who have the income to afford a mortgage and have acceptable credit, but donâ€™t meet traditional underwriting standards â€“ called full documentation or â€œfull-docâ€?.
Full documentation generally requires that applicants show that the income they claim was actually earned in each of the two prior years. This is usually done by presenting W-2s or tax returns for two years.
As we enter what some people see as a slower market, more people may be facing difficulty paying their loans. If this happens, there’ll be lots of blame passed around, and some of that blame will be placed at the feet of mortgage brokers.
I, meanwhile, will have escaped to the Cayman Islands.
The letter, below, was sent to me, earlier today. It discusses stated loans (sometimes known as “liars loans”), and the behavior of some unethical mortgage brokers.
My name is Steven Krystofiak, President of the Mortgage Brokers Association for Responsible Lending. www.mbarl.org I have a letter in a word document form that highlights the risks of the current loan industry unrealized by regulators and economists alike, mainly due to stated income loans.
Email me at [email protected] if you want me to send you a copy.
13 main points in the letter are;
1. Stated income loans are associated with fraud, and started to become popular in 2002.
2. Banks originate these loans because they are profitable and then sell them to reduce their risk.
3. Fraud is encouraged by the banks.
4. Stated income loans help no one.
5. Exotic loans originated with stated income are now causing foreclosures or forcing homeowners to refinance into negatively amortized loans.
6. Stated income loans are why home prices have skyrocketed. They have caused a large demand in the US housing supply.
7. Banks have sold their loans and have already made their profit. Investors will soon realize stated income loans are too risky and stop purchasing them.
8. Almost anyone can get a stated income loan for $950,000.
9. Stated income loans cost consumers hundreds of dollars a year because of higher interest rates.
10. Stated income loans allow tax cheats to purchase homes easier.
11. Stated income loans are not always faster than fully documented loans.
12. Appraised values are often inflated. Underwriters are basing their decision on inflated home values, inflated incomes and inflated assets. The only â€œrealâ€? number is the FICO (credit) score. This is why underwriters have become focused on FICO scores.
13. Rules are not enough, they must be enforced.