Reduced documentation and stated income home loan programs almost disappeared after the last financial downturn. Too many people who had questionable income sources were not fully verified and vetted by mortgage loan companies, and many could not afford to pay their mortgage payments when interest rates increased almost a decade ago.
After the mortgage meltdown, it was very hard to find reduced doc and stated income home loan programs. In 2018, they are still hard to find, but there are still some reduced doc loans available for first time home buyers who do not have tax returns available to prove their income. These are still generally known as stated income loans.
It is possible yet again for some first-time home buyers who are self-employed or independent contractors who cannot fully document their income. But lenders who provide stated income loans are not giving out money easily. You can expect that you will need to have good credit and ample cash reserves, plus a sizable down payment.
With many stated income home loan programs for first time buyers, you may need to put down 30% rather than the typical 20%. Some put down more than 30% and many lenders have a minimum requirement of 30% down.
Your employment is generally verified, but you will only have to state your monthly gross income on the application. While the lender will not normally check your tax returns, it will check that you have the money by looking at your bank statements and asset documents, such as retirement accounts.
On the down side, a stated income loan will usually have a higher interest rate and will be well above market rates. Many of the stated income loans are based upon the equity that you have in the property. The more that you put down, the easier it will be for you to get the loan. This can be a challenge for some to find first-time homebuyer loan when the applicant does not have a substantial down payment available.
Income Issues for Self Employed Borrowers
For stated income and reduce doc loans for the self-employed, one of the problems is they may say that they earn $6,000 per month, but on their tax returns, their income is only $4000 per month. Underwriters are required by federal law to use a complicated way of determining your qualifying income. They will begin with your taxable income but will add in certain deductions such as depreciation; this is not really an expense that comes from your bank account.
They also typically will take out windfall income. If the income source does not seem to be ongoing and stable, you cannot usually use it to qualify for your home loan as a first-time buyer.
Lenders also will look at your assets to check where your down payment is coming from. They do not want you to clean out your business accounts to make your home down payment. They also want to ensure you do not have undisclosed loans. If your bank account shows that you had a large deposit made in the last two months, the underwriter may ask that you show where that money came from.
On the employment side, you may not need to show a two-year employment history to get a home loan. For example, Fannie Mae may say that you can qualify with a year of self-employment if you have previous experience in the field. Fannie Mae also loosened restrictions recently for self-employed borrowers who do not take paychecks. They also do not need to have two years of tax returns to prove their income. Further, there are fewer restrictions for salaried borrowers with second self-employed jobs; they do not need to document that income if it is not needed to qualify for the mortgage.
Most self-employed borrowers can qualify for a reduced doc home loan with only one year of tax returns. So, all in all, many first-time borrowers who have alternative sources of income do have options for getting a home loan today. You should just expect to need a higher down payment, have a higher interest rate, and need to show proof of assets with other documentation than tax returns.
Reasons Not to Lie About Your Income When Applying for a Mortgage with a Bank
When people apply for a stated income mortgage, they may think about telling some white lies about certain aspects of their application, such as their total yearly income. Actually, telling lies about your income and other key items on your mortgage application with a bank can lead to serious problems.
It is unlikely that you will face the maximum penalties of a mortgage fraud charge. You would have to do something very bad and illegal to get hit with a 30-year prison term and a fine of $1 million. Courts generally reserve severe penalties for organized criminals and the worst illegal behavior of industry insiders.
However, if you are caught materially misleading a lender, you could get probation and thousands of dollars in fines. You also may need to pay thousands more in restitution. Also, if you compound the offense by producing fake documents, this could lead to prison time.
Mortgage Applications and the Law
It is not unusual for regular people not engaged in serious criminal activity to lie or exaggerate to get a bigger mortgage loan, smaller down payment or a better rate. In some cases, the applicant would not get approved if they did not engage in deception. They probably figure that it is no big deal; they are not harming anyone.
However, these types of activities are referred to in the industry as fraud for housing or fraud for property. These crimes are not as serious as fraud for profit or fraud for criminal enterprise, but there are still types of fraud.
The most common types of lies that are seen on mortgage applications involve income, assets, employment and property use. The latter is where someone buys an investment property but claims they will be living in it. Some loans, such as FHA, require you to live in the home and not use it as an investment property.
There is a story from Freddie Mac a few years ago where a woman’s previous employer fired her before she got final approval on her mortgage. She claimed she still had that job and she even forged a pay stub to back up the claim. This did not work out well because lenders nearly always verify employment again before the loan is finalized and closing is scheduled.
She got 37 months in prison for forgery, one court of computer fraud and a count of bank fraud.
Note that most fraud for housing cases are handled at the state level, but the FBI can have jurisdiction for crimes that happen across state lines, and those that involve government backed loans from FHA, USDA and VA.
Mistakes Aren’t Fraud
While deliberately lying about your income, and making up documents to support the lies, is fraud, a mere error on your mortgage application is not fraud. Almost every criminal offense requires that you are committing a guilty act. But you have to have a guilty mind when you committed the guilty act. If you do not have a criminal mind at the time, then it is merely a mistake without criminal intent.
That does not mean that you can just claim that obvious lies were mistakes; most juries will not fall for that.
When you put your signature on a mortgage application, you are making a certification that the information that you are providing is totally accurate. If you make a mistake that affects income, assets or employment and the lender finds out about it, it is possible that the lender could call the loan due.
But if you acted in a fraudulent way against the lender and investors of a higher rate and fees that they are legally entitled to because you were a higher risk candidate, then you can get in serious trouble. This is actually lying and stealing.
Getting Bad Advice Is No Defense
The fraud might not even have been your idea. Perhaps a mortgage broker suggested that you exaggerate your income. Or it could be your loan officer. While you might have the permission of your mortgage professional, you are the one signing the mortgage, so you are liable.
Actually, if a mortgage broker encourages you to lie about your income, your risk could be even bigger. They may have persuaded others to lie about their income or assets, so investigators could be more likely to catch them. If that happens, it is likely that law enforcement will go back through their mortgage application files and find yours.
In the end, it is never a good idea to inflate your income on a mortgage application. In the best case, if the lender finds out after the loan closes, you could have the loan called due, lose your home and have your credit ruined. In the worst case, if you did things such as forged documents, you could go to prison.