Let me start by saying, I prefer a “No Income” over a “Stated Income” loan. If you have to “state” an income, you’re potentially setting yourself up for committing fraud. A “no income” verified loan (where your income is blank on the loan application) does come with a slightly higher rate than a stated income loan, however, there are no questions about what is questionable…your income!
Recently, a home buyer contacted me for a second opinion on their good faith estimate. They had just made an offer that was accepted on a home. After reviewing his information, he revealed that the loan was stated income. I did not have all of their documentation needed for self employed borrowers (2 years complete tax returns, for starters) since I was just looking at closing costs and the rate. So I asked why they were going stated income. Here is his actual response:
“Let’s just say it’s income we’re hoping to achieve, but higher than what is on our tax return.”
Does that sound a wee bit concerning to you? For one, they are stating income they don’t make in order to qualify for a mortgage. When you’re self employed your income can vary quite easily. What happens if they don’t make the income they “hope to achieve” and they cannot swing their new mortgage payment?
I asked if his Loan Originator was going to have him sign a 4506 or 4506T. These forms are sent to the IRS so the lender (and what ever company your loan is sold to) can verify the income you are stating on the loan application by accessing your tax transcripts directly from the IRS.
“I did ask [our LO] about that, and she said it’s basically a formality – that they don’t actually pull the tax return…it’s just put [the 4506 form] in the file.”
Often times, the 4506 may stay “in the file”. However, if the borrower defaults on the loan, you can bet the first thing the lender will do is to grab the 4506 to compare what was stated on the loan application to the actual income reported to the IRS.
“Since I certainly don’t plan on defaulting, I’m going trust [the LO] and the bank on this one. She’s got an interest in this as well!”
The LO certainly does have an interest in the loan. She’s going to get paid and keep her real estate agent happy. Stated income and no-income verifiers are very easy loans to do as compared to doing a full document loan for a self employed borrower where you have to review and average incomes for the past two years. Yikes…the LO might actually have to pull out their calculator and do some hard math and go through someone’s tax returns. Oh dear!
Let’s assume worse case scenario for this borrower who is all ready admittedly overstating income at what he hopes to achieve…what he suffers a loss with his business and and is not able to keep up with his mortgage? As a self employed person, your income and costs are not secure or stable. This could quite easily happen to the best of people. Now you’re in a mortgage that you could not afford to begin with because you had to
over state lie about your income. Should your mortgage go into default, will the LO who put you into this loan stand by you? I doubt it. Plus, she’ll probably state something like “I had no idea they didn’t make that income.” She won’t go down holding the borrower’s hand in this case, far from it.
If you are considering a mortgage where you “state” your income on the loan application, you should know:
- Stated income loans are not created to exaggerate your income so you can qualify for a mortgage.
- Your stated income should compare to what you have reported on your gross income tax returns.
- Consider a “No Income Verified” loan vs. a “Stated Income”. The difference to rate, with good credit, is often not that significant. With no income stated, there are no figures to lie about. You’re qualifying on credit and down payment alone.
- Don’t lose sight on whether or not you can actually afford the mortgage payment. Qualifying for a mortgage does not mean that you should have the mortgage if you cannot make the payments.
Lying about your income, or anything on the loan application, is mortgage fraud. There are many other types of documentation available so that borrowers do not need to go this route (unless it makes sense–ie they actually have the income).
Still thinking about stated income? Watch this video from CBS.