Stated income can come back to bite you
December 20, 2006 | Mortgage | 
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Documenting income?is as important as a?good credit score if you want to qualify for the lowest rates and costs when applying for credit. Being able to provide FULL DOCUMENTATION will save you significantly and many lenders make it easy to qualify as FULL DOC by accepting bank statements in lieu of W2’s for self employed borrowers. However, those who can’t meet these requirements have been applying under STATED INCOME guidelines and this could open problems later.
Stated income allows you to claim an amount you earn without having to provide documentation to prove it. It is intended for borrowers who earn income they can’t prove…cash tips for example…and this income is a part of their everyday lives but can’t be documented. Unfortunately it has become known in the lenders circle as the “Liars Loan” as many borrowers files are simply switch to stated income as soon as they don’t qualify as full doc. The system allows for the abuse and loan officers are exploiting it without borrower knowledge in many cases.
It is important that you understand what you are claiming when you fill out a loan application. To state that you make more than you do is loan fraud. With that in mind, it is illegal for a loan officer to switch your file from FULL DOC to STATED INCOME unless you have told him to and it is as a result of other income not reported to the loan officer.
There is a right way and a wrong way for a loan officer to present that option. For example, to say: “You don’t qualify as a FULL DOC borrower, we are going to have to switch this to Stated Income to qualify…ok?”..is WRONG! It is a blatant disregard for the intent of stated income and is the primary reason homeowners end up qualifying for more than they really should.
The right way is “The loan you need requires $$$ per month income to qualify. If there is other income that is not showing in what you have provided and it is tough to document?you can select STATED INCOME which allows you to claim it without providing documentation. Can you state $$$ in income and would you like me to submit this under that status? This is a correct method a loan officer should use to explain this to a borrower. The vast majority never here anything close to this and this could open loan brokers to litigation.
For all those who claim the big problem is INTEREST ONLY loans or ADJUSTABLES…you are viewing this from the wrong side of the fence….the borrowers side. The problem exists on the lenders side and the qualifying standards they have created. This has led to homeowners in over their heads and when all this is combined (higher loan than they qualify for, pullback in values, adjustable rates) they end up in an upside down position that they can’t get out of. Many lenders will not allow you to switch to stated income once you have applied as full doc to avoid some of this but as a borrower you are still responsible for what you claim on an application and it is fraud to claim income you do not actually earn.
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[...] The largest offender of fraud in the current market is occurring on the mortgage side of the business. Loan officers have been fraudulently qualifying borrowers for mortgages that they shouldn’t be able to attain. Filing under stated income is the #1 offense. There are standards the lenders use to prevent homeowners from ending up in a loan they can’t afford. However, a loan officer who knows how to use whiteout and is willing to commit fraud can get a loan through the system without the borrower even knowing the fraud was committed. If a person is intent on stealing from you they will find a way. It is our job as homeowners to know enough to protect ourselves. [...]