Stated Income and No-Doc Loans Today: What the Terms Really Mean

Today, a search for "stated income" or "no-doc" mortgages usually leads to alternative-documentation loans, which verify your ability to repay with bank statements, a profit-and-loss statement, your assets or a rental property's cash flow instead of tax returns and pay stubs. True stated-income lending, where a borrower wrote down an income figure and the lender did not verify it, largely ended after the 2008 crisis when federal ability-to-repay rules took effect. Lenders still have to make a reasonable, good-faith determination that you can repay.

What stated income used to mean

Before the housing crisis, some loans let borrowers state their income on the application without proving it. The lender relied on the credit report, the property and the assumption that home values would keep rising. These loans were sometimes nicknamed "liar loans," because the income on the application was not always real, whether the borrower or someone else in the transaction put it there.

When home values fell, many of those borrowers could not afford their payments and could not refinance or sell their way out. Loans made without a real check of whether the borrower could repay were one of the factors behind the wave of foreclosures that followed. Lawmakers and regulators responded by putting verification at the center of mortgage lending.

What changed: the Ability-to-Repay rule

Under the CFPB's Ability-to-Repay rule, most lenders cannot make a mortgage without a reasonable, good-faith determination that you can repay it. In plain terms:

• Lenders must consider factors such as your income or assets, employment status, the proposed payment, other debts and credit history.
• They must verify the income or assets they rely on with reasonably reliable third-party records, such as tax returns, account records or documents prepared by someone other than you, the lender or the broker.
• They cannot qualify you only on a low introductory rate if the rate will rise later. They must make a reasonable effort to confirm you could handle the higher payment.

The rule also created the Qualified Mortgage category, a set of loans with safer features that gives lenders a presumption that they met the rule. Loans outside those features, or loans documented in ways the Qualified Mortgage rules do not cover, are non-QM loans. Qualified Mortgages cannot have features such as interest-only periods, negative amortization or, with limited exceptions, balloon payments. Non-QM loans are not held to the Qualified Mortgage rules, but lenders must still make a reasonable, good-faith determination of your ability to repay.

What "no-doc" and "stated income" usually mean today

When a lender, broker or website uses these terms today, they almost always mean "no tax returns" or "no W-2s," not "no proof." The loan is documented another way:

• Bank statement loans. Bank statement programs commonly review 12 or 24 months of personal or business statements. An expense factor is applied to business deposits, or a CPA- or tax-preparer-prepared expense letter is used.
• P&L loans. P&L programs use a profit-and-loss statement prepared or verified by a CPA, EA or licensed tax preparer.
• Asset depletion loans. Asset depletion (asset utilization) programs divide eligible assets by a number of months the program sets to create a qualifying income figure.
• 1099 loans. Some programs qualify independent contractors from their 1099 forms rather than full tax returns.
• Property cash flow loans. For investment properties, some programs look mainly at the property's rent rather than your personal income. Rental-property loans based on the property's rent are a separate category.

Each of these still involves documents. They simply use documents that may better reflect how a self-employed person, contractor, retiree or investor actually earns and saves.

Why "no-questions" lending is not how it works

If you see a pitch for a mortgage with "no income verification" or "no questions about your income," read it carefully and ask what the lender will actually review. A home loan you plan to live in is subject to the Ability-to-Repay rule, so the lender has to verify the income or assets it relies on. Rental-property loans based on cash flow are underwritten differently, but the lender still reviews the property, your credit, your assets and your experience.

Be cautious with anyone who suggests inflating income, using a letter from someone who has not reviewed your finances, or leaving debts off the application. Misstating information on a loan application is serious, and a loan you cannot afford puts your home at risk.

Who alternative-documentation loans tend to fit

• Self-employed borrowers whose tax returns show less income after legitimate write-offs.
• Independent contractors paid on 1099s.
• Commission or seasonal earners with uneven income.
• Retirees and others with substantial assets but modest taxable income.
• Real estate investors buying rental property.

Many of these borrowers have solid finances. Their income simply does not show up neatly on a pay stub or a tax return, so they need a lender that reads other documents carefully rather than one that reads none at all.

How your write-offs affect your taxes is a separate question from how a lender reads your income, so talk to a tax professional.

Trade-offs compared with a full-documentation loan

• Pricing. Non-QM loans often price higher than agency loans because they carry more risk for the investor.
• Down payment. Many programs expect a larger down payment.
• Loan features. Some offers include an adjustable rate, an initial interest-only period or a prepayment penalty. Ask about each one.
• Fewer choices. Not every lender offers these programs, so shopping takes more effort.

If your tax returns support the loan you want, a conventional loan or another option may cost less. A licensed loan officer can compare the two paths for you.

Questions to ask a lender that advertises no-doc loans

Advertising language can blur what a loan actually requires. These questions bring it back into focus:

• Which documents will you use to verify my income or assets?
• How will you calculate my qualifying income from those documents?
• Is this loan for a home I will live in, or only for investment property?
• Is the rate fixed or adjustable, and is there an initial interest-only period?
• Is there a prepayment penalty, and when does it apply?
• What is your NMLS number, and the loan officer's?

Clear, specific answers are a good sign. Vague answers, or a promise that nothing will be checked, are a reason to keep looking.

How to approach a "no-doc" search

Start with the documents you do have. If your bank statements tell the real story, ask about bank statement programs. If your preparer can produce a clean P&L, ask about P&L programs. If your savings are your strength, ask about asset depletion. Then ask each lender what documents the program requires, how income will be calculated and what loan features come with it. Compare offers using the Loan Estimate. Programs vary by borrower, property and investor, and every loan is subject to credit approval.

Frequently asked questions

Next steps

• No-Doc & Stated Income Mortgages
• Bank Statement Loans
• No-Doc & Stated Income Mortgages in Florida
• No-Doc & Stated Income Mortgages in New York
• No-Doc & Stated Income Mortgages in New Jersey
• No-Doc & Stated Income Mortgages in Pennsylvania
• No-Doc & Stated Income Mortgages in Connecticut
• No-Doc & Stated Income Mortgages in Virginia

Sources

• CFPB: What is the ability-to-repay rule?
• CFPB: Regulation Z, 12 CFR 1026.43, minimum standards for transactions secured by a dwelling
• CFPB: What is a Qualified Mortgage?
• CFPB: Loan Estimate explainer