Stated Income Mortgage Traps

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The stated income mortgage is getting harder to find these days. Stated income mortgage lenders are going under in droves and the ones remaining are curtailing the program effectively trapping borrowers who now can’t refinance away from rising payments.

Rob and I have been preaching to people for years about the dangers of the stated income mortgage. You can’t make up your income even on a stated income mortgage. That is loan fraud and it is wrong, wrong, wrong.

The problem is I don’t think people are actually scared of the words “loan fraud” or the prospect of prison.  However, they created their own prison of sorts by lying and making up income they don’t really have to qualify for the mortgage.  A few months into the loan, they realize they can’t make the payment.

A large number of the defaults in the marketplace right now are on the stated income mortgage. Whether the borrowers themselves participated in the fabrication of their income or the loan officer took it upon themselves to doctor the numbers, that decision was a catastrophic one.

And they can’t get out of it….they are trapped!

Gone are the stated income mortgages they used to get qualified last time. Gone is the fixed portion of the loan so their payments have adjusted upwards hundreds of dollars. So they walk.

I always thought as long as you had good credit and equity there would be a stated income mortgage for you.  But here in Colorado one of our lenders announced they do not allow any stated income mortgage loans at all!

So what are your options if you need a stated income mortgage?

First, let’s examine who needs stated income mortgage programs. Stated income loans are for self employed borrowers whose CPA writes off a sizable chunk of their income. This paper loss lowers their tax bill, but also lowers their income once again on paper…not in the real world. This fake loss can be added back into the person’s income to more accurately reflect his real world income.

So, if your CPA didn’t write off paper losses in a significant way, a stated income mortgage is not for you!

But that’s not how the program was sold to the public. Any self-employed person could use it, retired folks could use it, even wage earners, and, my favorite, the unemployed were told they could use it too! Due to the lack of documentation required, crooked originators (or crooked borrowers or both) could actually get these obviously unqualified borrowers approved.

Ooops…can you see the writing on the wall?

Ask the folks dropping their keys on the counter and moving before the sheriff shows up how that worked out for them.  Did anyone wonder how they would make the payment with money they didn’t earn?  I guess not.  And the investors who were creating the underwriting guidelines for these loans are also to blame.  When you let people who got paid a salary use a stated income loan you’re asking for trouble.  It was a guarantee the income number was a lie but they looked the other way in order to originate more loans.

There are still stated income mortgage programs out there for a self employed borrower whose CPA writes off most of their income, has good credit (680 or better), and has equity.  However, if you are in a state that is pulling the plug on the stated income mortgage altogether, here is something that may work.

I have found that a self employed borrower with very good credit and at least 20% equity very often can get approved with no tax returns required.  Your loan officer has to run your file through DU (if they don’t know how to use this or have access to it, find another loan officer who does).  Have them use your gross income amount and see if it comes back with no tax returns required.

Now I can’t stress enough here not to lie about your income.  Only use the income you actually generate.  It will only come back to hurt you.  If you can’t make the payment then don’t do the loan.  Don’t let anyone else tell you what you can qualify for…always figure out how much you are willing to spend every month.

Also, Fannie Mae (the investor who uses DU for underwriting purposes) changes DU all the time so they could pull the plug on this at any time but I have been running these for years and have seen this happen often.  Your loan officer just has to run it and see.

Once again having a technologically savvy mortgage provider comes in very handy when to comes to extricating yourself from stated income mortgage traps. Check out The Mortgage Advantage to learn how to locate this savvy, ethical mortgage provider in your own back yard.

Good Luck!