The Dangers of Fraud with Stated Income Loans

Stated income loans are not widely available for debts as large as mortgages. It used to be true that a borrower could simply "state" his or her income on a mortgage application. The lender would issue a loan based on this stated income, and the lender may not even check with an employer to verify the amount was accurate. Today, there are far fewer stated income loans available. Most stated income loans are very small, such as loans for computers or small appliances. It is more common for a lender to require proof of income, such as a paycheck or a tax schedule. The reason many lenders prefer this option is to avoid loan fraud. 

What Is Loan Fraud?

Loan fraud can occur on both sides of the debt. A borrower can supply bad information, getting a lender to make a loan that he or she would not otherwise make. For example, a borrower could provide the Social Security number of a person with good credit and even use this person's name on the loan. This is called identity theft, and it is the most severe instance of loan fraud. Some borrowers simply lie about issues like employment. On the lender's side, fraud typically means gathering borrower information for the purpose of identity theft.

Why Is Income Relevant?

Income is relevant in setting the limits of a loan. If a borrower commits fraud when stating income, the borrower is likely to provide an income level much higher than he or she makes. The borrower will be eligible for much larger loan limits as a result. For example, a borrower who wants a jumbo loan on a house could supply a falsely inflated income statement. When the mortgage company issues the loan, the borrower will likely have difficulty keeping up with payments. This can lead to foreclosure, which is a loss for both parties. For this reason, lenders want to guarantee an income prior to issuing the loan. Today, lenders will contact an employer to verify length of employment and income. This shows them how likely it is the person will continue to make a high salary. The longer they have been employed, the better.

What if a Lender Offers Stated Income?

Very few lenders do offer stated income loans. If one does, a borrower may question the lending practices of that lender. Lenders who make multiple loans without asking for income verification may face defaults in high numbers. To compensate for this, they will typically charge much more on their average mortgage interest rates. As a result, borrowers should be alerted to the fact that the lenders may be charging well above average on their loan. Borrowers may also wonder if the lender follows all federal regulations. For example, a mortgage lender must have strict processes for verifying income if the lender wants to work with the FHA. A lender who does not have these processes in place will not be FHA-approved, and they may not even meet loan requirements set by other agencies.

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