Looks like the part is coming to an end; stated income loans, which dominated the mortgage market throughout the housing boom, are now being examined much more closely by underwriters amid the current mortgage crisis.
Stated income, also known as the “liar’s loan”, is a documentation type that allows potential borrowers to simply state their monthly gross income rather than provide tax returns in order to receive financing, thereby skewing debt-to-income ratio numbers significantly.
This limited documentation type was originally intended to enable borrowers with tricky tax schedules to apply for a mortgage with less red tape. Often self-employed borrowers would elect to state income for convenience, paying a small adjustment fee to do so.
Unfortunately, the freedom to state income led to widespread mortgage fraud and even looser documentation standards such as no-doc loans, which require little more than a credit check.
Now most investors are scrutinizing stated income deals, leaving many banks and lenders with fewer options to sell off their loans on the secondary mortgage market.
This has led underwriters to cautiously evaluate all stated deals, especially those with larger monthly incomes.
Some banks and mortgage lenders are also requiring a form 4506 (Request for Transcript of Tax Return) be filled out on all stated deals, which allows the investor to verify the income and potentially return the loan to the bank or lender if things don’t add up.
What this means to potential homeowners is that banks and lenders are tightening financing standards, and making it all the more difficult to qualify for a home loan.
The good news is that a tougher qualification process should curb the historically high foreclosure rate and slowly legitimize the mortgage market back.
The bad news is that many small and mid-size lenders will close down, forcing loan officers and mortgage brokers to look for other jobs.