Bring Back the Stated Income Loan

Clearly, the state of our economy is not helping the real estate situation. It is harder for many to buy homes, and, as seen from the ever growing number of foreclosures and short sales, it is harder for many to stay in the homes that they’ve already bought.  With Obama’s Home Owners Affordability and Stability Plan there are incentives are being given to banks to restructure current loans in order to enable homeowners to stay in their home rather than foreclosing. But this is an arduous and daunting task and in the grand scheme of things, it will not do much to bring us out of this real estate slump. I was speaking with my boss this morning, Carlos Aguilar, President of Axia Real Estate Group in San Diego, and I asked him what it was that the real estate market needed more than anything right now. His answer, to no one’s surprise, was: Buyers. 	 Bring Back the Stated Income Loan

But why aren’t buyers buying? Prices are low and still getting lower, especially in Southern California. There are great deals out there and yet very few homes are being sold. Of course, money is tighter now than it has been in a long time, and that, without a doubt has a lot to do with this. But a main reason for the lack of buyers may lie in the fact that it has become very difficult to qualify for a home loan. This happened as a direct result of the sub prime fiasco. Regulations were almost non-existent at one point and it was necessary for the banks and the federal government to put their foot down and demand much more stringent guidelines for borrowers. So, away went 100% financing, away went the 600 Credit score borrower, and away went the possibility of stated income. Getting rid of 100% financing and disqualifying borrowers with poor credit were no-brainers. Those had to go. But stated income loans got a bad reputation during the sub-prime era, and their original purpose and value have been brushed aside. Bring them back with strict guidelines, and many more people, rock-solid borrowers, will be able to once again buy a home.

One of the perks of being self-employed is the business expense write-offs. Depending on your line of work, you can write off a ton of things as business expenses. And there is no doubt that a fine line exists between a business expense and something that can pass as a business expense. But writing off business expenses in order to lower one’s overall taxable income is a very common and very legal practice. There are millions of self-employed Americans who make substantial amounts of money, but each year they make it appear that they earn far less income than they actually do. And it was for these people that the stated income loan was invented.

So what went wrong? It was the greed that inundated the financial and real estate industries. The more people the banks could qualify for a loan, the more money they were making.  Guidelines were so lenient at one point, that in some instances, a store clerk earning $10 an hour, could state his or her income as substantially higher, and qualify for 100% financing on a $500,000 home. This may or may not be an exaggeration; it was really that bad. Exploiting the stated income loan, and qualifying borrowers for much more than they could afford is a huge reason why thousands of people have lost their homes. So why on earth should we even consider bringing it back?

Well, as Carlos said, our markets need buyers. There are a lot of investors and self employed business owners who cannot currently qualify for a loan even though they have impeccable credit and can easily afford to make payments. The main reason that stated income loans failed is because there were hardly any guidelines for them. It does not take a genius to come up with a set of strict regulations in order to keep stated income loans in check. Stated income borrowers might be required to put down more money, they will have to show substantial proof of their business and that they’ve been self employed for a minimum of three years. Their credit history must be substantial and flawless, and the banks cannot rely on brokers to provide all of this information themselves. The irresponsibility of those who exploited stated income loans should not be the reason that qualified borrowers cannot buy a home. I have not seen anything in Obama’s Home Owners Affordability and Stability Plan that addressed the issue of bringing buyers back into the markets, but that doesn’t mean much, because there is a whole lot of that plan that I have not heard about. I hope for everyone’s sake that it addressed this problem because if home loans continue to be this difficult to obtain for everyone, this uphill climb we’re already facing will be even more daunting.

By Andrew Brentan

19 thoughts on “Bring Back the Stated Income Loan”

  1. Stated income loans are great and should exist for self employed individuals. The only problem is people can get themselves in a really bad situation by exaggerating because they are desperate to get the house they “think they can afford” or are basing their income on what they “think they will make”. Lenders too only a year or two ago would go to great extremes to try to get someone into a mortgage, whether they could actually really afford it comfortably or not.

  2. Paul - Las Vegas Real Estate

    CNBC did a great documentary called “House of Cards” that goes into some great detail about what helped cause the mess to begin with. Unfortunately… it was not just people exagerrating their incomes but actual loan officers that were also involved.

    Next air times are:

    Wednesday, February 25th 8p ET
    Sunday, March 1st Midnight ET
    Sunday, March 15th 9p ET

    Well worth watching to get a really good idea of what was taking place. Pizza Delivery Guys becoming loan officers and making $20,000 a month…. classic.

    Stated income loans are needed as you point out but they need to have very strict regulations and the people doing them should be highly regulated to help spot out abuse from taking place to begin with.

  3. I don’t know if I agree with everything in your post, but you have definitely given me something to think about.

    Survival’s last blog post..4 Tips For Cold Weather Survival

  4. Interesting idea. I agree that it is buyers that will get the real estate train back on the track, but hadn’t thought of the liar loan as the way to do it. I just did a two part Mortgage Roundtable on my blog with a number of real estate notables including David G of Zillow and Rhonda Porter of the Mortgage Porter.
    Surprisingly, no one mentioned the idea of bringing back stated income.

    Geordie Romer | Leavenworth WA real estate agent’s last blog post..Leavenworth Windermere – Not Leaving Town!

  5. Fort Worth real estate blog

    The lenders welcome the state income loans because of the high credit scores they typically require as well as the borrower’s strong equity in the property.

    Fort Worth real estate blog’s last blog post..Executive Office Space in Fort Worth

  6. I love the idea. Funny that it’s probably the way it should have been done the whole time. With loan shark and people exaggerating their incomes, we have gotten ourselves into quite a mess.

    I go against the grain on this but I actually think the slow down in real estate will be good for the long term in American. No regulations which should have already been in place are finally being implemented. These rules will benefit us all as people who can actually afford a load will get them and those who cannot will be out.

    Stated income should be the primary way to get a loan anyway.

  7. Great, informative post! I would have to agree with Lorraine who commented earlier that it seems like more houses would seel as they are at such low prices, but with people having so much difficulty getting loans, this isn’t the case. Something needs to be done to find a solution.

  8. I completely agree. Stated income loans need a place on our market. I secured a stated income loan on last property I purchased here in Dallas. Many self employed agents depend on these types of loans and are hindered by the decutions taken out to lower income because of business expenses

  9. Very informative post. I agree now the economy is slow and everyone is facing recession but I think this is the best time to get some house because the prices are low now.There are many kinds of loans are available choose anyone and utilize it for the future.

  10. What is happening today is that those who have been irrespoinsible, who have bought homes they could not afford, who had terrible credit, are now being rewarded by having their loans modified, their interest rate reduced, and even their principal reduced. By contrast, those who have been responsible, who hava an excellent credit, who are willing to risk their own money by putting 20% down, are being turned down when applying for a loan.
    A responsible person knows what he can afford and what he cannot and does not need big brother to second guess him. If one has a good credit, and has never been late on any payment, it means that person knows what he is getting in, knows how to manage his finances and is an excellent risk. By contrast being able to show a job with an income, is far from guarantee that timely payment be made. One can loose his job. One can have othre problems. A responsible person will not go ahead and lose his 20% or 20% down payment, he will only get a house he knows he can afford, and his good credit is a proof that he is able to manage his finances. The insistence on “full doc” loan, only hurts the economy and the housing market, keeping buyers out of the market, and adding to the housing problems. in fact, the irony is that it keeps the prices downs, thereby actually increasing the number of forclosures, as more and more owners find themselves with negative equity.

  11. The reason that the stated income failed, is because the people wnated larger and more expensive homes then they could afford. Some Lenders were to happy to give in to that. The almighty dollar motivated them whether is was right or wrong. I personally reviewed there income statements, and together is was very easy to see what they could afford so they would not be house poor. Many times they were insistent. I do not believe it was totally the banks fault. There are many good LO’s out there that do care about the customer and their reputation.
    So lets take a look at the whole pic. The realtor has a home, they want to sell, the couple is set on that home whether it have been overpriced or not.. (after all that is the best of the best no matter their financial situation) then we come in to the pic, as Loan officers. And say this is what you are looking at for a monthly outgoing expense and money for leisure you decide. At that point they know longer want to work with me, the dream bubble was popped so they go to the broker that does not care. ( all is happy till they realize they cannot afford the payment with expenses that came up that were not expected. That is how it fell out.. NO one person to blame.
    Just the way I feel, and have seen. thanks

  12. Juan Rodriguez

    Your an idiot for recommending state income loans. If there is a remote possibility that someone can lie then take it away even if it helps some honest people because even somewhat honest people will start lying (it is an addiction) eventually if everybody else is doing it and making a profit- it is human nature. If there anything this bad economy has shown is that people can lie and are not to be trusted with money (the good book says the same thing), do not give them another opportunity to lie. You need more regulation that are enforced-law without enforcement is just scoffed at by most people-human nature again.

  13. Property in East or West ‘UpMarketArea’ gets pushed as being a bargain during a boom. After the bust, only ‘UpMarketArea Central’ retains its value.

    When vanity projects start going up the smart money starts getting out.

    Location is still the key criterion. If you can find a bargain in an upmarket area, get stuck in, I say.

  14. As a self-employed individual (Minnesota Realtor) I could never have purchased the house I now live in without the stated income, I write off as much as I can. I could easily afford the monthly payments.

    I can’t imagine trying to qualify for a loan today without a stated income loan.

  15. HI guys,

    Well hope this info helps someone: HUDSON CiTY and ISB still do Stated loans in a handful of states back EAST.

    HSBC was doing them end of 2010, not sure anymore, they are only retail now.

    I have access to Stated Income loans in CALIFORNIA, for SE OR W 2, i also have up to 10 MILLION for Super Jumbo, FHA FICO down to a 500 FICO, unlimited properties, any many more, hope this helps, email me for more details: THX

    [email protected]

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