In the start of the 21st century there were a number of loan packages that were developed to meet the needs of certain market segments. One of the more popular loans was the stated income loan. Also known as no doc loans, stated loans were designed for people who were self employed and had difficulty reporting their income. For the right borrower, these loans are perfect for helping them get a loan approved that they would not have otherwise qualified for.
Poor lending practices combined with negative media coverage has given stated income loans a bad rap over the past few years. One of the reasons for the housing crash in the U.S. was lenders unscrupulously approving loans to sub-prime borrowers. The problem with stated income home loans arose when mortgage brokers began signing clients who should not have qualified for these loans.
Some brokers would use the stated income technique as a means to artificially raise the income of their clients to ensure the loan was approved. This would even occur with people who have regular jobs with proper W-2 documentation for standard loans. This is one of the reasons why this particular loan was coined the “liar loan”.
The problem with these loans was that the typical borrower would inflate their income by up to 15% to 20%. Although a lot of the mortgage brokers knew they were inflating the numbers, the responsibility of the loan was then passed on to the banks, who then sold these loans under separate packages to other institutions. The lack of responsibility was one of the key reasons for these loans to be one of the key players in the housing market collapse.
Although many lenders have stopped offering stated income mortgage loans, you will still find a few lenders that do offer stated income mortgages. The specific segment that benefits most from the stated income loans are individuals who are self employed or small business owners. Individuals who are working for themselves often aren’t able to document their income with W-2 forms that traditional mortgages require.
A ratio that is commonly used to determine loan eligibility for non-stated income loans is the debt to income ratio. If this ratio is too high, the borrower is deemed too risky for the loan. Entrepreneurs who are self employed often have a large amount of debt because of business loans that they might have. This can often make skew their debt to income ratio negatively affected their loan application.
If you are currently looking to apply for a stated income home equity loan, it is important that you consider the pros and cons of applying for one. Although you might be able to state your income in the loan application, there are often a number of other requirements that you need to go through in order for your loan to be approved.