Are "Stated-Income" Loans a Thing of the Past?
Realtors and other self-employed people are finding it harder to get a mortgage even when they have a substantial downpayment. In the past many self-employed took out "stated-income loans," which don't require borrowers to fully document their income. Defaults were low. But as lenders loosened their lending practices and began offering these stated-income loans to other than affluent professionals, they became known in the industry as "liars' loans." Today many banks will not offer them at all.
Underwriting criteria for the self-employed have swung from a simple process to being tighter than any in modern times. The changes are increasingly frustrating a group of borrowers that banks once coveted: affluent self-employed professionals such as doctors, accountants, lawyers, and small business owners.
Banks say they have concerns documenting the self-employed's cash flow due to the deductions and write-offs that the self-employed show on their tax returns. And there are no W-2s to support their income. Lenders are also cautious because the non-salaried can have greater volatility in their annual income.
So as the Feds try to ease the housing crisis, thousands of good borrowers are frozen out of the market.