What is Stated Documentation for a Mortgage?

Stated documentation has received a bad rap lately because of the mortgage meltdown. In actuality, stated documentation is an extremely helpful tool for self employed people who need a mortgage.

It is made for self employed people who need to use their gross income amount. They have to be self employed for at least 2 years and usually need a certain amount of equity. The rate for a stated documentation option is higher than a full documentation loan.

One of the perks of self employment is being able to write off a substantial part of your income and get a tax break. This is not some trick used by the Enron accountants. These are legitimate tax breaks for business owners.

For example if you gross $120,000 as a W-2 paid employee, that is the number the loan originator and underwriter would use to qualify you for a new mortgage. Now, say you are a self employed person who also makes $120,000 a year. Let us also say your CPA writes off much of your income so on your tax returns, they show you only grossed $40,000.

Now if you actually make $120,000 a year, then you would be looking at a much different house than if you made $40,000 a year. $40,000 is not enough to qualify you for the mortgage you want and need but it is the number you have to use.

That is where stated documentation comes in. The underwriting guidelines say a self employed person can state their income with no documentation required like tax returns. The tax returns would show the write offs and the lesser gross amount.

Which means you can use the $120,000 amount to qualify for a mortgage. In a perfect world where everyone tells the truth about how much they actually make, that is the way these loans were supposed to work.

Unfortunately, stated documentation loans were dubbed “liar loans”. They turned into a haven for people and originators who would make up any number to get the loan approved and closed. And it was everyone from the real estate agent, the builder, the loan originator, and the borrower themselves. They all lied about income to push people into a much bigger house then they could afford. The bigger the house the bigger the commission for everyone involved. As for the borrower, they lied because they also wanted a bigger house.

Most of the time the borrowers were willing participants in this lie about their income but sometimes the originator would just take it upon themselves to lie for their borrower to get them qualified for a new loan.

There is definitely plenty of blame to go around. As if things could not get any worse, they let bad credit borrowers, retired borrowers, and borrowers with actual W-2 paid jobs get these loans. If you needed to get a stated loan with a W-2 paid job, you had to be lying about your income.

Because of the misuse of stated documentation mortgages, foreclosures are at an all time high. Yes, property values are dropping and ARMs are recasting but a good chunk of the foreclosures are caused by these liar loans. And just what did people expect would happen? Did they really think they could make a payment using money they pulled out of thin air? No, it doesn’t work that way. They acted like spoiled children and just wanted what they wanted and they didn’t care what they had to do to get it.

Because of them, the self employed people who need a stated documentation option to qualify legitimately for a mortgage are finding it harder and harder to find one. In declining markets like Colorado and Nevada, some lenders are not offering stated documentation at all.

Hopefully they don’t do away with stated documentation all together…it does work for an honest person.

Good luck!