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June 20, 2005
Stated income loans are also called �liars loans�, because in some cases, the
rules virtually invite the borrower to lie. The case below is a great
illustration.
�My husband makes $7,000 a month but has a credit score of 503. I make $1250 and
have a score of 690. The loan officer offered a mortgage in my name alone but I
must sign a statement saying that I bring in $7000 a month. I don�t make that
money but my husband does and we need the loan. Should I sign it? The loan
officer told me to sign it only if I was comfortable...It is called a stated
income loan.�
Stated Income Loans Compared to Full Documentation Loans
A stated income loan
qualifies a borrower using the income the borrower states on the
application form � 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 don�t meet traditional underwriting
standards � called full documentation or �full-doc�.
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.
Self-employed borrowers
usually have the most trouble meeting this requirement, and stated income loans
were originally designed to deal with them. But many applicants with incomes
from salaries also can�t meet full-doc requirements. For example, the income
they claim might incorporate their latest increase in salary, which is not yet
reflected in documents covering past income.
Stated Income Borrowers May Have to Execute IRS Form 4506
Some lenders require that the
stated income borrower execute a Form 4506, which authorizes the lender to
request IRS verification of the bottom line of the borrower�s tax returns for
the previous two years. Lenders who require a 4506 don�t ordinarily check the
returns, but the possibility that they might is viewed as an inducement to
report income truthfully.
If the borrower defaults very
quickly, the lender might check the returns for possible evidence of fraud. Many
mortgage brokers steer borrowers away from lenders who require the 4506.
In many cases, a check of tax
returns would not reveal a falsehood. This includes the case of the woman who
wrote the letter cited above, who filed a joint return with her husband. This is
probably why many lenders do not bother with a 4506.
Lenders Verify the Source of Stated Income
While lenders don�t check
income on a stated income loan, they do check the source of the income.
Ordinarily, they require that a self-employed borrower be self-employed in the
same business for two years, and that a salaried employee be employed in the
same line of work for two years.
The income stated by the
applicant is not verified, but it must be roughly consistent with incomes earned
in the type of business or line of work in which the applicant is involved.
Where the range of incomes is very large and the applicant comes in at the top
of the range, the underwriter might ask the applicant to strengthen the
application by showing significant financial assets.
Stated Income Lies
Stated income lies are less
about the true amount of income the borrower has available than about the source
of the income. Few loan officers or mortgage brokers will encourage borrowers to
exaggerate the amount of their income, because that is the surest path to
a default where everybody loses. But embroidering on the source of the
income is viewed as OK, so long as the borrower really has the income and is not
uncomfortable embroidering. Their general attitude is, �so long as the borrower
really has the income, what does it matter where it comes from?�
The inducement to lie on a SIL
is that the price of the mortgage, while higher than the price on an identical
loan with full documentation, is lower than the price with no documentation. For
example, the rate could be .4% higher on a stated income loan than on a full-doc
loan, but .2% lower than on a no-doc loan. (I took these adjustments off one
lender�s price sheet, another lender might price differently.)
The woman who
wrote the letter above can easily rationalize the lie that the income of her
husband�s is actually hers. Indeed, she lives in a community property state
where husband and wife share legal right to each other�s incomes. But the loan
officer did not try to persuade her to sign, and I didn�t either. She must be the custodian of her own conscience.
Copyright Jack
Guttentag 2005
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