A stated income loan, a type of mortgage, gets its name from the documentation the borrower must provide in order to qualify. In the case of a “stated income” loan the borrower is allowed to simply state their monthly income to qualify for the loan versus a having to prove their monthly income by providing documentation such as yearly tax returns or paycheck stubs.

This method of documenting a major factor used to determine whether a borrower can afford the loan they are trying to qualify for was initially intended for use by borrowers who had very high credits scores and substantial verifiable assets—the other two factors used to qualify a borrower. Banks came up with stated income documentation to simplify the application process for well-qualified borrowers that were not able to provide traditional income documentation.

The end result of a stated income mortgage and full documentation mortgage are the identical; the only difference is how the result is reached. A borrower must be able to qualify for a loan based upon three factors: credit score, assets, and income. The three factors are used to determine a DTI (debt to income) ratio; to qualify for a loan a borrower’s monthly payment should be below 45% DTI—meaning the loan total loan payment including taxes, insurance, principal and interest cannot exceed 45% of their monthly income.

A full documentation loan requires a borrower to prove their monthly income by providing 1099s, check-stubs or yearly tax returns. Verifiable income documentation means that a borrower will not be able to qualify for a loan they cannot afford. A stated income loan allows a borrower to state their income to qualify for the loan without the lender requiring proof.

This became a problem in 2008 when banks discovered that many borrowers that qualified for a mortgage with bad credit using the stated income documentation type had overstated their income in order to qualify for a bigger loan than they could afford. Because so many borrowers took advantage of the simplified stated income documentation to qualify for loans they couldn’t afford most lenders have ceased to offer this option to qualify for a mortgage.