Stated income loans allow borrowers to simply state their monthly income on a mortgage application instead of verifying the actual amount by furnishing pay stubs or tax returns.
This simplified method was originally intended for self-employed borrowers with complicated tax schedules, but has recently become more widespread, often because borrowers find it that much easier to qualify for a loan by stating their income.
For that reason, stated income loans are also occasionally referred to as “liar’s loans” because it is suspected that many borrowers fudge the numbers in order to qualify for a home loan. Back to that in a minute.
So how does a stated income loan work?
Well it’s pretty straightforward really, though it does depend on documentation type.
A full documentation loan requires that you verify income with tax returns or pay stubs and also verify assets. That’s just listed here for comparison sake; it’s not a stated income loan.
A SIVA loan, or stated income/verified asset loan, allows you to state your monthly gross income on the loan application and requires you to verify your assets by furnishing bank statements or a similar asset document.
A SISA loan, or state income/stated asset loan, allows you to state both your monthly gross income and your assets. So in this case, both items are simply stated, and the bank or lender will not ask you to verify the information.
In all of the above cases however, the bank or lender will verify your employment by calling your employer, or requesting a CPA letter if you are self-employed. This is important because your job title will determine what you can state in the way of income.
If you’re a doctor, it’d be normal to state that you make $50,000 a month. But if you’re a kindergarten teacher, underwriters won’t believe that you’re making $10,000 a month. It’s just not likely, nor does it make sense for the position. And for this reason, many loans that “overstate” income will subsequently be declined.
It’s actually quite common to see a mortgage declined on the basis that the income does not match the job title/description, or seems too high for the related position. And if you’re curious where underwriters determine how much a certain occupation should earn, check out Salary.com. That’s where many are instructed to pull the numbers to see if it adds up.
Another “setback” to a stated income loan is that a bank or lender can ask that you fill out an IRS Form 4506, which basically authorizes the lender to request IRS verification of your tax returns for the previous two years.
Although it’s not common for them to actually look up your returns, it can be enough to deter a would-be “liar” from overstating their income. It’s most common for a lender to pull a 4506 only if you become delinquent on the loan in a short period of time. But if they do pull a 4506 and find that you indeed overstated income, you could be charged with fraud, so take caution.
Stated Income, Higher Rate
If you do choose to state your income, you must pay a premium because you’re putting more uncertainty and risk in the hands of the lender and subsequent buyer of the loan if sold on the secondary market. For this reason, interest rates on stated income loans are often .25% to .50% higher than a full doc loan.
Related to that, you may also find that you’ll have to put down a larger down payment or sport a higher credit score to obtain the financing you need. Again, this becomes an issue of layered risk, and because you chose to state your income, the lender may limit risk in other departments such as credit and down payment.
In closing, it’s probably safe to say that stated income loans are becoming a lot more restricted because of recent credit tightening worldwide. You may find that the option is becoming less prevalent, forcing many borrowers to provide full documentation or come to the table with a larger down payment.