The AZ of Fixed Income Loans

Here is the breakdown of the declared income taxes, also known as “loans without income test” or “no-doc” loans. They sound wonderful – until you see the price.

That’s why they sound wonderful.

You do not need to provide proof of employment or income. On the other hand, you don’t want to go through the 60-day hassle of filing back-to-back documents that open the can of worms of your income details. You don’t have to file tax returns or provide proof of income.

But then there’s the price…

Standard income loans first appeared in 2008. Their innovator was the Ameriquest company. They were offered by banks as part of their regular repertoire and were cheaper than today. Then came the series of defaults, and the banks withdrew as fast as they could. Today, only a few intrepid individuals underwrite the loans and fund them out of pocket. To ensure maximum profit and balance risk, these unconventional lenders impose arbitrary rules, terms, payment rates, and schedules.

Here’s the good news of fixed income loans as they come out in 2015:

If you are a borrower, your lender will request the following:

  • No W-2 income documents

  • No filing of tax returns required

  • No IRS documents

  • No proof of employment is required

Instead, you will simply be asked to state how much you earn and they will take you at your word. No wonder these loans are called “liar loans” or “liar loans”! Reported income mortgage loans are also becoming increasingly popular among borrowers with poor credit ratings, particularly those who have an unstable source of income or whose self-employment income is reported on their taxes. Your application for a specified mortgage loan will be approved based on your cash reserves or equity and your ability to afford the monthly payment. Whether or not you can depends largely on what you tell your lender.

The terms of these loans make them attractive to customers with a wide range of credit histories, including subprime borrowers. The lack of verification makes these loans easy targets for fraud.

other factors

Reported income loans are also attractive in that they fill a void of situations that normal lending standards would not allow. For example, a standard rule is that a customer’s mortgage and other loan payments should not account for more than 45% of the person’s income. This makes sense when a person is applying for a mortgage on their first home. However, a real estate investor can own multiple properties and receive only a small amount more than their loan payments on each home for each, but end up with $200,000 in disposable income. Nonetheless, a loan with no reported income would reject that person because their debt-to-income ratio would not be in line. The same problem can arise with self-employed borrowers, where the bank with a fully documented loan would include the borrower’s business debt in its debt-to-income calculation. Loans with proven income also help borrowers in cases where fully documented loans would not normally view the source of income as reliable and stable. Examples of this are investors who regularly make capital gains.

Finally, fully documented loans also do not take into account potential future increases in income. (This is similar to the non-disclosure loan).

So what’s the catch?

A lot. There are higher interest rates for one. Lenders take a huge risk by giving you this type of loan, so they want to make sure it’s worth it for them. They’ll ask you for huge repayments – think twice, if not triple, the rate of a traditional loan. So remember that you will be making generous repayments every month.

Then there is the higher probability of failure. Banks cover their risks by assessing your ability to repay. In this way, they reduce the probability of failure. Unconventional lenders who issue these reported income or “no-doc” loans basically take anyone’s word for it. Most of these applicants tend to overestimate their income, thereby falling into an undesirable level of bankruptcy.

In August 2006, Steven Krystofiak, President of the Mortgage Broker’s Association for Responsible Lending, reported that his organization compared a sample of 100 mortgage applications with declared income to IRS records and found that nearly 60% of the sampled borrowers increased their income by more exaggerated than 50 percent.

Fraudulent abuse of these loans had increased to such an extent that in 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act went into effect to restrict loans with reported income. Section 1411 of the Act states, “A creditor making a home mortgage loan must review amounts of income or assets relied on by that creditor to determine ability to repay…”.

Today, lenders conduct their own version of the income and assets test, but many borrowers can still slip by and be left bankrupt. Lawsuits, stress and bankruptcy are some of the consequences.

In short, this is…

Reported income loans are still offered by some small banks. Qualification requirements are based on stable employment, good reserves, good FICO, and a minimum 40% equity ratio in the property. Loans with reported income are also offered by independent individuals who fund out of their own pocket and may be more lax in their requirements. The availability of specified income loans varies from state to state and county to county. This type of loan is ideal for the self-employed or for borrowers who do not have a stable source of income, as well as for applicants with low credit scores and applicants who do not want their income records to be verified by insurers.

The price is high. So if you find this intimidating, you might want to consider the chance to go the conventional route.

Do you think Fixed Income Loans are the right path for you?