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.
Rhonda,
Great post, I agree with everything you are saying. I work with a lot of first time home buyers and there has been times where they have asked me to raise the income just a little bit more so they can afford a house and they dont understand why I cant.
Anyways, also about the 4506, I used to be an AE for a wholesale rep and if the income on a stated loan didnt “make sense” they would actually pull the 4506 to make sure and it definately caused problems.
Great post!
John
Thanks, John. There are so many alternatives to stated income loans, such as no income, or no ratio. And bottom line, like you said, if the borrower cannot afford it, they shouldn’t buy it.
Rhonda
Another great topic. It is “interesting” how/why clients seem to think that we can just put any amount in. We need to remind them that these loans have been called “liar’s loans”for a reason.
No income (no ratio) loans have their concerns also. We have to remember that, in general, a good underwriter is still going to look at the borrower’s employment in relation to the assets that are verified as well as to the “resonability” that a certain borrower can make that payment. Someone buying a $700,000 property with 5% down, doing a no income loan, with only $12,000 in reserves and who puts car mechanic as employment, “may” still have a problem getting approved.
Still, your point is right on. All things being equal, no income documentation is better.
Rhonda,
Great post. Now more than ever, its vitally important that mortgage brokers protect their customers and themselves by staying away from activity that can be considered fraudulent in any way, shape or form.
Stated loans that are used to inflate borrower income are bad business practice that can get brokers in trouble with lenders and regulators. More importantly they can get homeowners in trouble by getting in over their heads with a mortgage payment they can’t afford.
Morgan
Stated Income , in my opinion, was developed for the savy bussiness owner. He/she excerises thier legal rights to funnel thier profits/funds through thier LLC or small bussiness in order to avoid paying higher taxes. Many times, thier documented income is in fact much less than what they really make.
These individuals need to state thier income in order to qualify for whatever loan they desire. As an LO, I always made it my responsibility to “MAKE SURE” they could afford the mortgage payment in question. That requires simple calculations. Yes, you must do some math….
Furthermore, I NEVER had any of my clients, who ultilized a stated income loan, sign the 4506 form. The lenders I used did not require it for funding, and if they did, I would go onto the next lender. So, if any of my past clients do in fact default for some other unforseen reason, they will not be auditted by IRS.
I feel that many “lazy” LO’s,or inexperianced LO’s, took the Stated income route because it was just “plain easy”. I feel many people whom refinanced or purchased in the last couple of years could of in fact gone full doc… But as someone earily in this blog mentioned, that requires getting more paperwork, which in turn equates to more work. And yes, many of those clients, could not indeed afford the mortgage payments…
Lastly, I dont feel that I should do a “no income” loan for someone, have them pay a bit more in interest rate for the documentation, when they could use the vehicle of the “stated Income” loan. Why? As long as they could afford the mortgage payment, and have the stability of thier income, they should go “stated”. Thats why it was developed. Just stay away from the 4506…..
David, why have a borrower sign a 1003 (loan application) with an income higher than what they’re reporting to the IRS? Often times, with the no-income verified, the difference in rate was very small and the NIV carries less risk (of committing fraud) for the borrower.
Maybe I’m missing something Rhonda. Question? When will the IRS see thier stated income without they signing the 4506 form? My understanding is, when they sign the 4506, they authorize IRS to audit the file. without it, they don’t.
Also, It’s been a while since I’ve done any stated loans… Everything for me has now shifted to full doc/ FHA loans… What I can recall, the no doc’s programs always had rates .5% higher, along with stricter prepayment penalties. What are our thoughts?
David, there were (key word “were”) lenders that had very competitive NIV products for clients that were credit/asset worthy.
A 4506 allows the lender to obtain a tax transcript from the IRS. Often times full doc loans will have 4506 for quality control purposes in the event the file is selected for a random audit.
The IRS is not auditing the file.
NIV or stated income loans have been around for a long time. The 100% aspect was never around though nor was statting your assets to get that 100% loan. That is how they were said to be giving away money.
Carl, although stated income loans may have been around for a while, lenders lowered the bar and who could obtain one. It really became a joke which helped to drive up the housing bubble–people were added to the home buyer market with a blank check and no regard as to how they would actually make the mortgage payment.
If I had to chose between which was more damaging to our real estate market, I’d say stated income over 100% financing.