Stated Income Loan

You've probably heard a lot of talk recently about how common it was for lending institutions to give out Stated Income Loans during the housing bubble. This type of loan was a popular option for those concerned that their income, or lack thereof, would lessen their chances of securing home lending. With a stated income mortgage application, lenders didn't ask borrowers for pay stubs, tax returns or other standard documentation that showed proof of their income.

A mortgage based on stated income was at one time only offered to the self-employed who didn't have W-2 forms for income verification. Self-employed people claim significant write offs to reduce their taxable income and many couldn't qualify for loans using their actual income. Some also have cash tip positions that they don't always claim taxes for and, as result, a waitress could be making $6,000 a month in cash tips and not qualify for a home loan due to underwriting guidelines that want proof of income.

For this reason, stated income loans were implemented to help anyone from entrepreneurs, to the creative class, to street vendors, cab drivers and waiters, practically anyone with incomes that were difficult to document, qualify for loans to purchase property.

Borrowers with a good to average credit standing, regardless of income, were seen as low risk loans. Stated income mortgages were made available to those with credit scores in the range of 580 to 600. Even those with excellent credit scores higher than 730 were eligible for Stated Income Loans with absolutely no penalty in rate.

Regrettably, what happened, is a good thing turned into something that was abused by lenders, brokers and borrowers. People applying for a stated income mortgage would exaggerate their actual income and claim to make more money than they actually did. A 2006 study by the Mortgage Brokers Association of Responsible Lending revealed that, out of 100 stated income mortgage applications, nearly 60% of the applicants overstated their legitimate income by as much as 50% or more.

Between 2001 and 2006, companies were all too eager to offer stated income loans to borrowers because there was an industry mad rush to CLOSE, CLOSE, CLOSE and this type of loan was much easier to close quickly than loans requiring full documentation.

During the great housing bubble, these loans were offered to practically anyone. Lenders and brokers abused stated income mortgage loans and had little concern as to whether or not borrowers had the financial means to pay back their loan because loans were often packaged and re-sold to competitors. But what happened is more people acquired loans that they couldn't afford to pay back. Homes around the country were lost to foreclosure, home prices tumbled and the mortgage lending and banking industries collapsed.

This has made obtaining a stated income loan these days relatively difficult. Lenders have curtailed the use of these types of loans. Steps have been taken by OneWest Bank (formerly IndyMac) to make stated income mortgages disappear from most major lending institutions. That said, you can still find some companies willing to take your word on stated income. They just may require that you complete an IRS form with your stated income mortgage application to confirm that you file taxes.