Stated income loans can be considered in contrast to a full documentation loan. Full documentation loans require people to prove they make as much income as they state with tax returns, statements or pay stubs from employers, and statements from any banks in which they hold assets. When people are self-employed, they may not have this option, though it is possible for lenders to still verify income by asking to see the previous two year’s tax returns or by asking to get a note from a public accountant certifying the income a person states. Some companies will still offer stated income loans to people, though this option has become less available since the 2008 recession and credit crisis.
There are a couple of ways that stated income loans might work. The lender could ask applicants to verify their statement of income by providing some bank statements, or they could ask for a statement of assets and income that don’t require verification called a SISA (stated income/stated assets). The second may be more dangerous, since it is possible for someone to fudge the numbers slightly in order to hopefully get a loan. However, lenders do tend to look at what is considered “reasonable income” in a profession. If there seems extreme exaggeration in the stated income, as based on reasonable income figures, they may not feel the numbers are accurate and will turn down the loan.
While creative accounting might seem like a good idea, it is not a benefit to potential borrowers who use a stated income loan technique. In addition to looking at reasonable income, lenders may also request tax returns for two years. In the US they ask borrowers to sign an IRS form 4506. If it turns out that the person did exaggerate on income amounts, this is actually considered a fraudulent act, and the person could be prosecuted. It is very likely that lenders will now ask for this form and will attempt to verify income by other means. It’s therefore extremely important for people to not obtain a loan by lying about income.
There are some other reasons why stated income loans are disadvantageous. They usually require excellent credit because there’s slightly more risk in taking the word that a borrower earns what he or she says. In addition to the good credit requirement, people may need a high down payment, and might have to pay slightly higher interest on the loan.
Some might wonder what the advantages would be in getting stated income loans since most people will pay more interest, need impeccable credit and may need a bigger down payment. The principal advantage was initially for people who were self employed, as it was more difficult to prove income via self-employment. Others simply find that applications for these loans convenient because they don’t have fill out all the paperwork associated with a full documentation loan. On the other hand, even half a percentage point in interest increase over the life of something like a mortgage could make a large difference in payments and eventual interest paid. Though there may be initial time saving benefits to this type of loan, the total costs for it may well exceed its benefits.
