Stated income loans (sometimes called Alt-A) became popular in 2002, and have since become mainstream. They were created by mortgage lenders as a way for those with unconventional, irregular, or cash incomes to qualify for a mortgage loan. These individuals have the income to afford a mortgage and have acceptable credit, but earn income that is not easily verified. For example self-employed and commissioned borrowers often make more money than they can prove. The stated income home loans do not require you to provide your pay stubs, W2s, 1099s, tax returns, and other documentation required to verify your income. Instead you simply state what your income is and the bank or mortgage lender believes you. For this reason stated income loans are considered much higher risk than full documentation (or full doc) loans. Which brings us to the issue of fraud.

In some cases a fraudulent stated income loan is the only way for an individual to purchase a home. The temptation is all too great to simply provide the numbers required to secure an approval. There have also been stories of loan officers themselves recording inflated numbers on applications for stated income loans to generate a high volume of approvals. Lenders’ income and bonuses are tied directly to the volume of loans they approve so the temptation is great for them to falsify the income on the application without the applicants knowledge. By signing the application without thoroughly reviewing it, the applicant is confirming the information provided is accurate to the best of their knowledge. This has led to stated income loans being called liar loans.

It is unfortunate stated income loans have been misused in this way, because they provide a valuable option for honest, hard-working self-employed individuals to obtain a mortgage and buy a home. It is an accountant’s job to to take advantage of available write-offs and deductions so the small business owner shows as little taxable income as possible. This result however is at odds with the banks, who base the payments you can afford on this reported income. The stated income loan resolves this conflict. Let’s hope a few bad apples don’t ruin it for everyone.