Liar, Liar and Stated Income Mortgage

Adolf Hitler likened liars to great magicians. Herein he flops again because a borrower who lies about his income to qualify for a stated income mortgage cannot wave a magic wand to conjure oodles of cash when he cannot pay his monthly dues.

Are You Ready to Fool the IRS?

The Stated Income Mortgage is not a full documentation mortgage, meaning there are fewer details in the mortgage arrangement and these may not be verified at all. This invites the borrower who wants the money urgently and the sales agent who wishes to sell a mortgage fast to commit fraud. In spite of the risk, this type of mortgage is common.

Take the case of a self-employed husband and a wife who is gainfully employed. The man makes more money than the wife does but he has a low credit score while his wife has a very good credit rating. The sales agent tips the wife to sign the application form in her name but with the husband’s income recorded. This would have been an arrangement made in heaven had the wife no qualms about lying.

Since the wife shared a joint return with her husband, the falsehood may not be detected. This is why a lot of lenders do not bother looking into the 4506 but when there’s a missed payment, all hell breaks lose.

The Allure of Stated Income Mortgage (SIL)

They have the income to qualify for a mortgage but they don’t have the legal document to prove this per requirement for traditional mortgage loans. The Stated Income Mortgage offers a way to let these people get a mortgage.

This type of mortgage is ideal for the self-employed who have great incomes and a good credit rating BUT cannot meet the requirements for full documentation mortgage. They cannot produce the tax returns or W-2 showing proof of income for the last two yeas.

There are also employed potential borrowers who have just gotten a raise but since this is not reflected in the previous two years W-2, they cannot get a full doc mortgage so their only option is to apply for a Stated Income Mortgage and lie through their teeth.

The Danger of SIL

There are lenders who require the execution of Form 4506. Once you submit this form, you give the lender authority to request IRS verification for your tax returns of the last two years and even five years back. This blanket authority imperils your privacy, as you lose control over the lender’s actions if he continues to pry into your income tax returns.

The lenders may not pore over the 4506, but they will surely do a check on your source of income. As a requirement, the borrower whether self-employed or a salaried employee should have been at their occupations at least two uninterrupted years prior to the mortgage application. Should there be a missed payment, then expect trouble with the IRS.

Other Similar Loans

There are similar loans to the SIL. There is the Stated Income and the Stated Asset Loan that requires nothing beyond the declaration of assets and income. Another is the No Income No Assets format only demands a good credit rating. But nothing beats the SIL when it comes to opportunistic lying.