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Stated Income - Creative Financing or Fraud?
| | Thursday, September 30, 2004 @ 08:53 AM EDT
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Inactive Account Properties
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One of the most common recommendations for avoiding problems with Debt to Income ratios or DTI is to get a stated income loan. This way you don’t have to show documentation for the income that you are stating on the loan documents. But the loan documents have a section where you sign that all of the information provided by you is correct. So how do you state your income without committing loan fraud?
But first I need to explain what a stated income loan is. Lenders first stated doing stated loans for non W-2 people. This included business owners, consultants and other people who had a lot of write offs but could not show a lot of income. Most of these people had plenty of disposable income but a low gross income. (Thanks to good tax advisors.) So lenders
started allowing those with good credit to state their income.
Then lenders found that some times W-2 employees sometimes had situations where they should be allowed to state income. Often when someone gets a new job they get a large raise. But they do not have two years of tax records to show this income. So which income can they use? Now stated income programs are available to W-2 employees. Employment will be verified but they will not ask your employer about income.
One word of advice in this situation income for the type of work must be reasonable. If your flipping burgers and stating $100,000 a year the lender is not going to believe that.
I am sure that now you want to know how the lender can find out if you lied on the application. During the loan process you will sign a form giving the lender authorization to your tax records. If you default on the loan the lender will pull your tax records. If the income stated on the application can be justified then you’re in the clear. If not you have a problem.
So how does this affect a real estate investor? Actually it is quite simple if you have a job and a real estate business you have two sources of income. One from your job and one from real estate. You can add these together for your income; you can even add the expected income. As long as you can justify the income it is not fraud.
The disadvantage of stated income programs include lower LTV and higher rates than full doc loans. The rates are not that much higher and you can still find very high LTV programs with stated income loans.
The advantages are you can use all of your income to keep your DTI ratios in line. Rates and LTV’s are better than no doc loans.
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