The current real estate crisis can be attributed to a number of factors like aggressive and easily persuaded appraisers, aggressive builders rasing the prices on newly built homes simply because there is a waiting list, wall street went into the mortgage business too lenient and as a result lending guidelines became too relaxed for borrowers working or not and sometimes with no assets either.

Let’s examine the ladder part. The real estate market was pretty sound with banks setting guidelines of how much a borrower could borrow based on their maximum debt to income ratios being in the 36% range, and 40 to 45% for FHA government loans.

With stated income loan, if your debt ratios were above the maximum allowed, the lender, loan officer or mortgage consultant would simply ask you more questions about bonuses, under the table earnings, side jobs, etc to get you over the hump to qualify.

The stated income loan has existed for quite some time. As far back as the early 90’s but the banks and mortgage broker companies had it firmly set at 75% maximum and stricter asset requirements and 25% down payment or 25% in equity. These rules worked very well. Then along came wall street which raised the guidelines for everyone since they were the ones reselling the loans on the secondary mortgage market.

Below are some definitions and loan types which perhaps you have or heard of:

Subprime Loans: Risky loans made to borrowers at higher interest rates than conventional loans with full documentation or Alt-A loans.

Alt-A loans: include mortgage loans with characteristics of no income or asset (down payment) verification. These loans had a slightly higher interest rate around .25 to .375% higher than full documentation loans during the market heights and were offered to borrowers based on their stated income and credit scores.

Neg-Am or Option ARMs; A new type of variable interest rate home loan which gives the borrower the choice of 3 to 4 payment options usually deferred interest payment, interest only, 15 year rate payment and a 30 or 40 year payment choice:

*Some issues with the loan: If borrowers simply pay only the minimum payment, it will not be adequate to pay the interest charged on the loan for the prior month and the unpaid interest will be added to the original loan amount which results in deferred interest or negative amortization. The deferred interest results in the loan balance increasing instead of payign it down but who cares in a market that is increasing 20% epr year in some cities in the country. Surely Washington Mutual did not care which is why they are gone as well as IndyMac bank.

*Interest-Only Payment: The choice to pay just interest-only.

*Fully Amortizing Payment: Pays principal and interest – the typical way, but it was not flashy enough for an upmarket.

Stated income loan was made primarily for 1099 professions, doctors, lawyers, corporate officers, and top salesman plus people who had a salary and received substantial year-end bonuses like wall street stock brokers.

A stated income loan normally meant the verification of liquid assets, your job history of two years in the same field or position, and that the income stated is in line with your profession. Mortgage lending underwriters normally confirmed the stated income by going to salary.com

The no-ratio loan, which is in the family of low doc loans, functions where the lender checks to see if you are eligible by taking out your income bu verifying your assets & job.As a result you are not falsely stating your income significantly higher than it actually is so you are not committing loan fraud.

Another type of low documentation loan is the stated income stated asset loan (SISA). The lender does not need income evidence or asset proof when you apply for the loan.This loan never existed until late 2002 to 2003 and it is the epitome of a liar loan as you can falsely give income and falsely state your assets simply to qualify. It is one of the most irresponsible type of loans that used to be offered.

Nowadays, if your stated income loan (with verified assets) is approved ,you will need to sign IRS tax form 4506 which authorizes the lender to obtain your last two tax returns from the Internal Revenue Service.

Most lenders randomly-check around for their quality control aspect. The process involves verifying a stated income loan by comparing the income on the loan application with the income on your tax return. If a discrepancy is found on your return, you will more than likely have a big problems. The outcome gives the lender the option the ability to demand immediate repayment of the loan, or worse jail time and fines.

So be careful if your lender asks how much money you earn, and you give out a much higher number than what is it because they will go with that figure but you ultimately sign the application.