Here’s detailed information on reported income taxes, also called “no income verification” loans or “no documentation” loans. They sound wonderful, until you see the price.
Here’s why they sound wonderful.
You do not need to provide proof of employment or verification of income. On the other hand, you don’t want to go through the 60-day hassle of submitting one document after another that opens the can of worms of your income details. You won’t face the red tape of having to file tax returns and verify income.
But then there’s the price…
Standard rental loans first emerged in 2008. Its innovator was the company Americast. Banks offered them as part of their regular repertoire and they were cheaper than today. Then came the series of defaults and the banks pulled out as fast as they could. Today, only a few intrepid people sign for the loans and finance them out of their own pockets. In order to ensure maximum benefit and offset risks, these unconventional lenders set arbitrary rules, terms, payment rates, and schedules.
Here’s the good news for reported income loans as they appear in 2015:
If you are a borrower, this is what your lender will require:
No W-2 income documents
No need to file tax returns
IRS Document Number
No need to show proof of employment
Instead, you will simply be asked to state how much you earn and taken at your word. No wonder these loans are called “liar loans” or “liar loans”! Stated income home loans have also become increasingly popular with borrowers with poor credit, especially for people who have an unstable source of income or have reduced self-employment income shown on their taxes. Your application for an established home loan is approved based on your cash or equity reserves and your ability to pay the monthly payment. Whether or not you can do it is essentially based on what you tell your lender.
The terms of these loans make them attractive to customers with a wide range of credit histories, including high-risk borrowers. The lack of verification makes these loans simple targets for fraud.
Stated income loans are also attractive because they fill a gap in situations that normal lending standards would not approve of. For example, a standard rule is that a client’s mortgage and other loan payments should not account for more than 45% of the person’s income. This makes sense when it comes to someone applying for a mortgage for their first home. However, a real estate investor may have multiple properties and for each one may receive only a small amount more than her loan payments on each home, yet end up with $200,000 in disposable income. However, an unreported income loan would turn this person down since their debt-to-income ratio would not be in line. The same problem can arise with self-employed borrowers, where the bank with a fully documented loan would include the borrower’s business debt in its debt-to-income calculation. Stated income loans also assist borrowers where fully documented loans would not normally consider the source of income to be reliable and stable. Examples include investors who consistently make capital gains.
Finally, fully documented loans also do not consider potential future income increases. (This is similar to a ‘no income disclosure’ loan.)
So what’s the catch?
Plenty. There is greater interest for one. Lenders are taking a lot of risk in giving you this type of loan, so they want to make sure it’s worth it. They will ask for enormously large repayments: think double, if not triple, the rates of the conventional loan. So consider that you will be shelling out magnanimous payments each month.
So, there is the greatest possibility of default. Banks cover their risks by evaluating their ability to pay. In this way, they reduce the chances of default. Unconventional lenders who provide these stated income, or ‘no doc’ loans, basically take anyone at their word. Most of these applicants tend to overstate their income and fall into undesirable levels of bankruptcy as a result.
In August 2006, Steven Krystofiak, president of the Association of Mortgage Brokers for Responsible Lending, reported that his organization had compared a sample of 100 reported-income mortgage applications to IRS records, and found that nearly 60% of those borrowers in the sample had overstated their income by more than 50 percent.
The fraudulent misuse of these loans had grown so large that in 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act went into effect to restrict reported income lending. Section 1411 of the Act states: “A creditor making a residential mortgage loan shall verify the amounts of income or assets relied upon by said creditor to determine ability to pay…”.
Today, lenders conduct their own version of income and asset verification, but many borrowers can still go under the radar and find themselves out of business. Court cases, stress and bankruptcy are some of the results.
The summary is this…
Some small banks still offer declared income loans. Qualification requirements are based on stable employment, good reserves, good FICO, and no less than 40% ownership interest. Stated income loans are also offered by self-employed individuals who finance out of pocket and may be more lax in their requirements. The availability of established income loans varies from state to state and county to county. This type of loan is ideal for people who are self-employed, or for those borrowers who do not have a stable source of income, as well as for applicants who have low credit scores and applicants who do not want their income documents reviewed by subscribers
The price is high, so if you find it intimidating, you may want to consider taking the risk of going the conventional route.
Think Stated Income Loans are the way for you?