Are Stated Income Loans Illegal?


Are Stated Income Loans Illegal?

Are stated income loans illegal? One of the many causes of the phenomenon known as the “housing bubble”, (1) was the stated income loans (2). To deal with the collapse of the housing market, the Obama Administration passed the Dodd-Frank Act (3) which prohibited the institute of the aforementioned loans where the condition of eligibility for the borrower was the formal declaration of his will and ability to pay the contractual obligation (4). However, some years ago, this Act was partially dismantled (8) by the S.2155 (5) that rolled back a good part of it (6) without actually repealing it (9),  because of the severe problems it was generating to our country (7). As a consequence thereof, we can say that stated income loans are back, but with variations that we will explain easily based on the new reforms (10).

So today, after these reforms and rollbacks, are stated income loans illegal?

Stated income loans are illegal now only for owner-occupied properties after the Dodd-Frank financial reform was passed in 2010. Therefore, it is now illegal for any prospective borrower to obtain a stated income mortgage loan for an owner-occupant property. However, they are allowed in the case of borrowers purchasing a real estate object for investment purposes that will not be occupied.

Today, stated income loans require proof of income, but you can use bank and financial statements to prove your ability to pay.

You cannot buy a house for living without proof of income, as this is prohibited now. Today’s stated income mortgage still requires you to prove your income, but you can do so with bank statements rather than traditional documentation, such as W-2s, pay stubs, and tax returns. We discussed in another article, how is the situation in California regarding the non-QM market in this article.

 They come in various names (e.g. “no-doc”, “low doc”, “SISA”, etc.) Depending on the state, current regulations, and even to the extent of the uniqueness of a population’s needs, stated income loans can be quite flexible, thus offering a viable choice for those with equally unique financing needs.

What Legislation Made Stated Income Loans Illegal?

The legislation that made stated income loans illegal was the Dodd-Frank Act, partially rolled back in 2018 during the Trump Administration.

Conclusions

The recommendation is to prepare a range of bank statements covering not less than a timeframe of six months 

Further Reading

We have interesting articles about non-conventional mortgage loans. The basic ones we will recommend to you are: stated income loans, where we discuss if they are currently legal or not, how can you obtain one, and the situation of these loans in California. We are also covering other non-conventional mortgages, such as the ITIN mortgages.

No doc hard money loans and the very similar hard money construction loans.

If you are into conventional mortgages, we suggest you read the following related articles.

We explain the FHA loan requirements completely, with the current limits for this year. We also go through the appraisal guidelines, and moreover we are worried about the peeling paint and why it can be an issue.

Completing forms is necessary, so we also study the number format of an FHA case and how to submit an FHA file, how to complete the form HUD 92900, the form for the FHA notice to the homeowner, and the FHA Financing Addendum.

Furthermore, there are two conflicting situations that can occur that are the situation of a conditional commitment and the identity of interest.

David Laidler

I am David, economist, originally from Britain, and studied in Germany and Canada. I am now living in the United States. I have a house in Ontario, but I actually never go.  I wrote some books about sovereign debt, and mortgage loans. I am currently retired and dedicate most of my time to fishing. There were many topics in personal finances that have currently changed and other that I have never published before. So now in Business Finance, I found the opportunity to do so. Please let me know in the comments section which are your thoughts. Thank you and have a happy reading.

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