Most of us are familiar with the standard process of a mortgage or loan application. We are often sent away to obtain piles of documentation confirming we are who we say we are, confirming our address, our bank account details and most importantly, confirming our income. A stated income mortgage, otherwise referred to as a ‘liar’ mortgage, ‘no doc mortgage loans’ or a ‘low doc’ mortgage, is a mortgage that can be approved with the bare minimum of documentation.
While most mortgage applications are accompanied by a stack of paperwork, a ‘low doc’ mortgage isn’t. There is to a degree a higher risk for lenders offering these types of loans. Dishonest people can end up claiming they earn way more than they actually do, simply to secure the loan and purchase the home they want. While this might be a quick fix for them, they in the end will be the ones penalized. If they do not meet their mortgage repayments the worst case scenario is they could end up loosing their home, other assets, destroying their credit score and filing for bankruptcy.
However a stated income mortgage is not something that is designed to trap dishonest people. There are plenty of genuine cases where this type of mortgage is more suitable than any other.
Self employed business people can often have trouble documenting their exact annual income. Business debts could be held against them in the application for a personal mortgage, or they may not wish for their business profitability to be known by the bank. For these people this type of mortgage would be ideal.
Those people who generate their income from investments, particularly those that invest for a new home could be declined your average mortgage on the basis of their debt to income ratio, even though they could be earning large sums of disposable income each year. They would not have any problem making the required mortgage repayments however because of other current finance they could actually be turned away. These people would look to applying for a ‘low doc’ mortgage.
Privacy, especially financial privacy is more important to some people today than it ever has been before. The simple fact that you don’t want to give out so much personal and financial information to a third party is reason enough for a lot of people to apply for a stated income mortgage. Whatever the reason is, it is nice to know that buying a home is not solely dependant on documenting every single detail of your life.