Stated income loans and the brokers / lenders who sell them have come under a lot of fire lately, some of it justified. Brokers or loan officers who actively encouraged borrowers to overstate their income and take on loans that there was no way they could pay deserve to be run out of the business on rails. And borrowers who lied about their income, knowing that there was no way to pay the mortgage if they didn’t manage to flip their new property deserve to be prosecuted for the fraud they committed.
But stated income loans have their place and it would be a shame to lose a product that helped many with ‘alternative’ or hard-to-prove but legitimate sources of income get homes. Stated income financing need not depart from common sense and approved applications should at least pass the ‘laugh test.’ If you can’t submit it with a straight face then just don’t.
Intelligent underwriting guidelines should have prevented many of the defaults that took place. No, LOs and brokers should not be expected to be underwriters, but there is a fine line between doing a zealous job for a client and countenancing fraud. So here for those who launched their career during the latest frenzy and never witnessed common sense are Stated Income Red Flags:
1. The new payment will substantially exceed the current housing expense. If the borrower didn’t manage to save a bunch of money when the payment was lower, where should the lender expect the money for the new, higher payment to come from?
2. Spending doesn’t support the income stated. While some high income borrowers don’t use much credit they are in the minority — even if you pay your cards off each month you would likely use them for convenience. A high income borrower’s report should show the ability to handle a higher level of debt — if he has a couple of credit cards with $300 limits and a $200 car payment I’d have doubts about the income.
3. Assets don’t support the income stated. There is a reason many lenders required 6 month’s stated income in the bank — not for reserves but as a means to extrapolate the borrower’s real income. $60,000 invested shouldn’t be that tough for someone making $10,000 a month if she is indeed making $10,000 a month.
4. All sources of income are easily verifiable. If the income is all wages, with no major investments or businesses, there is only one reason not to just supply the W-2s. Duh.
5. The borrower claims full-time income for a part-time or home-based business. According to Beverly Williams, president of the American Association of Home-Based Businesses, “there are very few legitimate [work-at-home job] opportunities available.” Additionally, a Canadian government study found that 73% of home-based businesses contribute less than 5% of the monthly family income.
So if this stuff comes up when you are interviewing your borrower, ask the tougher questions. The butt you cover may just be your own.
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{ 14 comments… read them below or add one }
This is an excellent article Gina. I am a loan officer who has very high end clients. Almost all of them do their loans stated income. They do this because most are self employed with very complicated tax returns. The majority have excellent credit and lots of assets and are very qualafied. They also put down a minimum of 20%. They state their true income and this program makes the process much less of a hassle for them. Once again as you stated this loan has a purpose. Thanks for the great article.
Amen Gina, it would be sad to loose the opportunity to do a stated loan for a a borrower that truly needs it, we can only hope that brokers and loan officers take your 5 statements to heart. it really could be there very own butt they are covering the way the lenders and the FED is cracking down.
“Hard to prove but legitimate sources of income…” What does that even mean?
Sounds like code for “borrowers who wash as many personal expenses as possible through their business to avoid taxes, yet still want to eat their cake.”
Forgive my cold little tax-paying W2 heart if it does not break for these folks.
Tax returns can be complicated, yes, but they can be analyzed. It is not rocket science and this is an argument for lazy origination, not common sense or making things easy for a borrower.
How hard is it, really, for a borrower to come up with tax returns for a year or two? You can draw them from the IRS with their permission – just sign a form.
Those two arguments, (too complicated, tough to document) are really just about wanting to do more deals at all costs, which is the mindset that got us into this mess.
Though there are exceptions, stated income is/was mainly a tool for lenders to avoid making exceptions on iffy income (at best) or just doing deals for the sake of deals (at worst) and inviting a landslide of fraud and misrepresentation along the way. Either way they set up “the borrower lied” argument for the day the loan goes bad, since even when “coached” the borrowers signature tends to be on the documents. Funny that.
And if you are into that as an LO, fine, just admit you are talking your own book, and don’t ask the rest of the world to smoke the same dope.
Sorry for the rant Todd – these comments aren’t particularly directed at the poster or commenters above, they just happened to hoist two of my major pet peeves, and I could not resist.
By all means Alex, rant away. Your comments are ALWAYS welcome here. The abuse of Stated Income loans is no doubt part of the reason our industry is now suffering.
I still maintain that stated income has a valid place in lending. For example, I had a borrower who derived a substantial part of her income from child support. Well her ex refused to provide canceled checks and she had never kept copies of the checks or deposits. We could have gone through a lot of hoops but this was a seller’s market (remember those?) and we didn’t want to lose time. An NIV solved the problem. And what about self-employed borrowers whose income is sufficient on average but fluctuates? I had a borrower whose average income over three years was $300,000 a year and over 5 years was even more. However on a full-doc loan the underwriter insisted on using his worst year as representative of his annual income (and no it wasn’t the most recent year). So instead of $300k he was credited with $120k which was not enough to qualify. Not only was this guy a perfect candidate for an option ARM to smooth out his cash flow but doing a stated income deal made perfect sense — gee, a stated income option ARM — the borrower must be a liar and the LO must be pure evil….too many jump on this bandwagon without knowing enough about the business; must be all the daytime TV
give me a break.
I hope you don’t mind me jumping in the middle of this thread.
I have been a NIV home buyer for the past 20 years and 4 homes and just got a wake up call today.
I recently sold a home in Oregon and found a home in Colorado I’d like to purchase.
the purchase price is 235K and I am putting 135K down.
I just found out today that I have to close on my loan by May 2, 2008 or my window for getting a NIV loan will have closed.
My credit score is about 700, I am self-employed as a marketing consultant, and my business is new so I will need to go the NIV route. I always have.
Never any problems.
You all have your fingers on the pulse of the mortgage crisis..
What gives?
Will the NIV ever come back?
My Google search came up with a lot of articles on IMG suspending these types of loans.
Will I ever be able to get a loan, or is this product going to be suspended forever?
I look forward to your replies.
Thank you.
Suzy,
Let me suggest going to the local Bank or Credit Union in Colorado where they lend their own money!
Explain your situation to them and provide any documentation showing income (bank statements, deposits, tax returns etc) for your new business as well as for the past 2 to 3 years.
Also provide proof that you have experience in the “marketing” business (I’m assuming that you’ve been in that industry for at least the last 2 to 3 years).
Obviously you’ll need to provide proof of your liquid assets. You might even suggest moving a portion of your liquid assets into their Bank or Credit Union and letting them freeze that money for a period of time to lessen their risk of you defaulting on the loan.
You are putting $135,000 down on the property and your credit score is decent so I don’t see a whole lot of risk for the Bank or Credit Union.
Obviously if you’ve filed your 2007 tax return and you have very little to show for income then you might still have a problem! In this case it’s like Alex said above: “You can’t have your cake and eat it too!
Good Luck
Hi Suzy,
I don’t know your entire story but someone putting as much down as you are with credit scores over 700 should still be able to get an NIV loan. I’m a little confused about why you have “always” gone with NIV loans but now you have to only because your business is new. Without knowing the whole picture I’d guess it has something to do with the source of income. Is “marketing consultant” a new field for you? Is it a home-based business or do you have a business location? Do you have a business license, and have you formed a business entity such as an LLC or corporation? Can your CPA write the underwriters a letter about the nature of your business? These are the kinds of things that make a business seem legit; the absense of a businesslike presence screams “hobby” or worse, “unemployment.”
Additionally, do you have assets to support the income that you are claiming (besides the proceeds from the sale of your home)? Finally, I’m not sure why your loan officer is saying that you have a May 2 deadline — perhaps that just indicates changes that will take place at one company and you might want to check with another lender.
Good luck:)
Thank you for the replies. I am still in the process of checking with different lenders in Colorado. Some say I can still get a SISA loan, while others, like the current broker I am working with, say those loans are gone forever.
I am a little leary of the lenders who promise me a stated income loan. I would hate to go to closing and have no loan.
Thanks for your insights. I will keep researching to find out what is really going on.
Thanks so much!
Okay, so we’re looking at stated income and no assets, not just stated income — which gives me the impression that the business isn’t just new, it doesn’t actually bring in sufficient income to support the purchase. Loans that don’t make sense — that is, stated income loans made for the sole purpose of income misrepresentation — are going away — that’s what’s “really going on.” The lender is probably doing you a favor by forcing you to wait until you have stabilized your income and are in fact in a position to afford the property. However, if buying it now is the right financial decision for you (you know your position better than I do), check with a lender to see if putting down less on the property and maintaining higher reserves will make you a better candidate for a loan.
jeff 04.02.08 at 4:41 pm
Sorry Jeff but YOU ARE WRONG…If you state their TRUE INCOME you would not have a loan. The TRUE income is the income reported on the income tax returns.
If you are doing a loan where you STATE the income that the CLIENTS provides you (not the true income), I suggest that you create a form with bullit points (have the client initial each point) that explains how they STATED the income NOT YOU…then have them sign it in blood.
Thanks,
dennis
I understand the need for stated income loans, but seems to me this is a recipe or disaster. How can you trust the goodness of human nature while lending money? You can trust, but you have to verify. And that comes only from solid proof of income.
In 99% of the cases a tax return should easily document income. Now if someone has understated their income on their tax return they really don’t deserve a loan anyway, do they?
Gina said “However on a full-doc loan the underwriter insisted on using his worst year as representative of his annual income ”
The above is an legitimate use of a stated loan. The irony is, it is simply stupidity on the part of the loan originator. Why would he not approve a solid borrower like you describe but would approve a higher risk undocumented loan?
“Hard to prove but legitimate sources of income…” What does that even mean?
Sounds like code for “borrowers who wash as many personal expenses as possible through their business to avoid taxes, yet still want to eat their cake.”
Forgive my cold little tax-paying W2 heart if it does not break for these folks.
Tax returns can be complicated, yes, but they can be analyzed. It is not rocket science and this is an argument for lazy origination, not common sense or making things easy for a borrower.
How hard is it, really, for a borrower to come up with tax returns for a year or two? You can draw them from the IRS with their permission – just sign a form.
Those two arguments, (too complicated, tough to document) are really just about wanting to do more deals at all costs, which is the mindset that got us into this mess.
Though there are exceptions, stated income is/was mainly a tool for lenders to avoid making exceptions on iffy income (at best) or just doing deals for the sake of deals (at worst) and inviting a landslide of fraud and misrepresentation along the way. Either way they set up “the borrower lied” argument for the day the loan goes bad, since even when “coached” the borrowers signature tends to be on the documents. Funny that.
And if you are into that as an LO, fine, just admit you are talking your own book, and don't ask the rest of the world to smoke the same dope.
Sorry for the rant Todd – these comments aren't particularly directed at the poster or commenters above, they just happened to hoist two of my major pet peeves, and I could not resist.