Stated income mortgage loans were among the most popular loan programs over the last decade or so. What is a stated income mortgage loan? It is exactly as it sounds, the borrower simply states their income. Employment is verified by the mortgage company but wages are not. This allowed many first time home buyers and self-employed individuals to qualify for much higher loan amounts during the recent real estate boom.
Stated income loans have all but disappeared due to the recent crisis that is plaguing the mortgage industry. So what is the state of stated income? If a borrower were to call a mortgage company to obtain a quote for a stated income loan, they could expect to be told that it does not exist. The fact is that it does exist, but it is being offered by a very limited number of companies and the credit standards for the stated income program are more restrictive. For the most part, only individuals with high credit scores
are eligible and they will likely be required to have verifiable liquid assets in reserve.
Sub-prime stated income loans were the culprit of many of the current problems in the mortgage industry. Sub-prime borrowers generally have lower credit scores resulting from past issues with paying creditors in a timely fashion. These types of borrowers are among the highest risk candidates for mortgage companies. If they can qualify under a full doc scenario (provide proof of income), the credit score may not be as much of a problem. When a borrower has proven the inability to pay creditors and is allowed to state their income, which will generally be much higher than their actual income, it is not difficult to understand why the state of stated income is virtually non-existent.
New home buyers were among the many that were devastated by stated income mortgage loans. It often went something like this. A potential first time home buyer contacts a mortgage company to get qualified for a loan. The new home buyer generally does not have a lot of experience with mortgages and/or how they work. This individual expects the mortgage company to determine whether or not they can afford the home that they are about to buy. If the credit score was over 700 this person could qualify for virtually any loan amount based on the income that would be stated by the loan officer or mortgage broker that was handling the loan. There are a few different twists on this scenario but often a janitor would be called a maintenance supervisor and would show a stated income of $100,000 a year.
The tighter (smarter) mortgage companies were able to avoid these types of situations and scenarios but that was not the case for the majority of mortgage companies. We have seen the fall of some of the biggest mortgage operations in the country and we now see the major problems that Fannie Mae and Freddie Mac are facing. The mortgage industry, consumers, and the government are learning some serious lessons, or at least let’s all hope that they are. This situation could have and should have been avoided. As for the state of stated income, it is left with mud on its face.
