The term liar’s loan came about when some borrowers came up with falsified information when they were applying for a loan. But even some lenders were untruthful when offering the loan to borrowers. Back then, some loan products opened doors for unethical practices for borrowers and lenders. However, the nature of these loans remain true; to help those who cannot qualify for conventional loans get an alternative financing. Sad to say, some people abused this opportunity and exploited it too much.
No-documentation loans and low-documentation mortgage loans are basically that. Borrowers may qualify for a mortgage loan without having to submit all the standard documents a conventional loan requires. A stated income loan is a good example of this loan type. The borrower simply states his/her income and the lender will take the person’s word for it.
Call it a liar’s loan, but you don’t have to lie to get financing.
The convenience and leniency these loan products offer made it easy for unscrupulous people to abuse. this became rampant until the term “liar’s loan” was coined for such loans. Nonetheless, a no-doc or low-doc loan as created more opportunities for certain people.
Individuals who cannot produce income and asset verifying documents turn to stated-income loans to find financing. These borrowers may have non-traditional incomes sources or have a personal business or are self-employed. Even so, this does not necessarily mean they do not have the money to afford the monthly payments.
Qualifying for a stated income loan is pretty straight forward. The lender will allow you to state your monthly gross income and your assets. The lender, may it be a bank or a private lending company, will not ask you to verify this information by asking you for documents.
What is verified?
Not having your income verified doesn’t necessarily mean nothing else will be. If you have a job or you work for somebody, the lender may contact your employer to verify your employment. If you are self-employed your lender may verify this by asking you to submit a CPA letter.
Loans like these will care a much higher interest rate than a full documentation loan. It may also ask you to put a larger down payment or will require a higher credit score. This is done to lower the level of risk the borrower has. For lenders, not being able to verify your income poses a great uncertainty on their part.
Per contra, if your situation has made it impossible for you get other loans, a stated income loan may help. You can start shopping for lenders. Knowing the loan offers from different lenders will give you more options to choose from.