Stated Income Loans (Liar Loans) Are Back!

During the 2004-2006 Housing Boom, the lending scene got totally out of control.  Everyone wanted to buy properties to cash in on the rapidly rising real estate market.  Toward the end, people started to have problems getting their loan applications approved.  Lenders started to get lax on their underwriting standards.  They offered “stated income” loans.  Buyers could essentially claim to make whatever income was required to get their loan approved.  Initially, lenders could get away with having sloppy loan approval standards because of the secondary mortgage market.  Soon after originating a loan, lenders would package the loans and sell them to investors.  Investors would get a “guaranteed” return on their investment and banks got their cash back to turn around and make more loans.  If a buyer defaulted on the loan, the bank could care less since it was the investors problem to deal with.

Those strict underwriting standards were actually in place to protect the consumers and banks.  During a downturn in the economy, having adequate income and savings helped home owners weather the storm.  As you can imagine, throwing out these protective lending standards was a recipe for disaster.  We built a fragile house of cards that came crashing down during the 2008-2009 recession.

I have been trying to refinance my rental homes for a few years.  The homes I purchased in the low $200,000s are now in the mid $300,000s.  I have a decent credit score.  But, my debt to income ratio is too high to get approved for a standard loan.  I collect a healthy amount of monthly rental income.  But, lenders told me too much of the money goes toward: mortgage payments, taxes, insurance, property management fees, HOA dues, maintenance, and vacancies.

With the strong real estate market, lenders started offering “stated income” loans again.  (When this blew up in our faces ten years ago, people referred to them as “liar loans”.)  You still need a decent credit score.  They will ask for a hefty 20% or more down payment.  And, the interest rate is a little higher.  But, this opens many possibilities that have not been available for the past decade.  If you have problems getting approved for a standard loan, ask your lender about these stated income loans.

We like to make banks out to be the bad guy when they disapprove our loan application.  But lenders check your credit, verify income, and demand cash reserves for their protection and your protection.  Remember the painful 2008-2009 recession and be very cautious if you elect to pursue this option.