AZ of loans with declared income

AZ of loans with declared income

Here’s the low down on stated income taxes, otherwise known as “non-income-verified” or “no-document” loans. They sound great – until you see the price.

That’s why they sound great.

You do not need to provide proof of employment or income verification. On the other hand, you don’t want to go through the 60-day hassle of submitting document after document that opens up the can of worms of detailing your income. You won’t face red tape related to filing tax returns and verifying income.

But there is also the price…

Standard income loans appeared for the first time in 2008. Their innovator was the company Ameriquest. These were offered by banks as part of their regular repertoire and were cheaper than today. Then came the series of defaults and the banks pulled out as fast as they could. Today, only a few intrepid individuals sign the loans and finance them from their own pockets. To maximize profits and offset risks, these non-traditional lenders set arbitrary rules, terms, payment rates and schedules.

Here’s the good news about payday loans as they look in 2015:

If you’re a borrower, here’s what your lender will ask for:

  • No W-2 income documents

  • No need to file tax returns

  • No paperwork from the IRS

  • No need to show proof of employment

Instead, you’ll just be asked to state how much you earn and you’ll be taken at your word. No wonder these loans are called “liars’ loans” or “liars’ loans”! Stated income mortgages are also becoming increasingly popular for borrowers with poor credit, especially for people who have an unstable source of income or have reduced self-employment income shown on their taxes. Your application for a specified mortgage loan is approved based on your cash reserves or equity and your ability to afford the monthly payment. Whether or not you can depends largely on what you tell your lender.

The terms of these loans make them attractive to customers with a wide range of credit histories, including subprime borrowers. The lack of verification makes these loans easy targets for fraud.

Other factors

Declared income loans are also attractive in that they fill a gap of situations that normal lending standards would not approve. For example, a standard rule is that mortgage payments and other customer loans should take up no more than 45% of the person’s income. This makes sense when it comes to a person applying for a mortgage for their first home. However, a real estate investor may have multiple properties and for each of them may receive only a small amount above the loan payments for each house, but end up with $200,000 in disposable income. Regardless, an undeclared income loan would turn that person down because their debt-to-income ratio wouldn’t be in line. The same problem can arise with self-employed borrowers, where a bank with a fully documented loan will include the borrower’s business debt in the debt-to-income calculation. Declared income loans also help borrowers in cases where fully documented loans usually do not consider the source of income to be reliable and stable. Examples include investors who consistently earn capital gains.

Finally, fully documented loans also do not take into account potential future income increases. (This is similar to the “no income disclosure” loan).

So what’s the catch?

a lot. There is a higher interest for one. Lenders are taking a huge risk by giving you this type of loan, so they want to make sure it’s worth it. They will ask you for huge repayments – think double if not triple the interest rates compared to a conventional loan. So think about setting aside a generous payout each month.

Then there is a higher chance of default. Banks cover their risks by assessing your ability to repay. In this way, they reduce the chances of default. Non-traditional lenders who hand out these stated income or “no-document” loans are essentially taking everyone at their word. Most of these applicants tend to overestimate their income, resulting in undesirable levels of bankruptcy.

In August 2006, Steven Christofiak, president of the Mortgage Brokers Association for Responsible Lending, reported that his organization compared a sample of 100 declared mortgage applications with IRS records and found that nearly 60 percent of the sampled borrowers have overstated their income by more than 50 percent.

Fraudulent abuse of these loans has grown to such an extent that in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act went into effect to restrict payday loans. Section 1411 of the act states: “A home mortgage loan lender must verify the amounts of income or assets on which such lender relies to determine repayment ability…”.

Today, lenders conduct their own version of income and asset checks, but many borrowers can still slip up and go broke. Lawsuits, stress and bankruptcy are some of the results.

In short, this is…

Declared income loans are still offered by some small banks. Qualification requirements are based on stable employment, good reserves, good FICO and no less than 40% equity in the property. Declared income loans are also offered by independents who fund from their own pockets and may be more lax in their requirements. Stated income loan availability varies from state to state and county to county. This type of loan is ideal for self-employed individuals or those borrowers who do not have a stable source of income, as well as applicants with low credit scores and applicants who do not wish to have their income documents reviewed by insurers.

The price is high, so if you think that scares you, you might want to take the chance of going the conventional route.

Do you think declared income loans are the way for you?

#loans #declared #income

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