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| Getting A Mortgage
Without Proof of Income |
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| SAN JOSE, Calif. -- Dec. 2, 2004 -- It sounds like a
mortgage borrower's fantasy: You tell the lender what your
monthly income is but provide no proof. Then, presto, you
get approved for a loan. For people whose credit is good
enough, "stated income" loans work much like this. Consumers
pay slightly higher interest rates for such loans, but
bankers are making more of them than ever. |
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| With the end of
the refinancing boom in late 2003, lenders started looking
for new ways to boost business, and stated income mortgages
-- and related "low documentation" loans -- were one
solution. Lenders have learned over the past decade or so
that credit scores are the best predictors of whether a
borrower will pay back a loan, so stated income loans are
not as risky for
lenders as they might sound. |
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Additionally,
the country's changing employment patterns and demographics
are resulting in more people who can benefit from these
loans, experts say. There's a growing number of people who
don't have steady paychecks and can't easily document their
income but who are good candidates for stated income loans.
Among them are small-business owners, commissioned
salespeople and independent contractors. So are new
immigrants who might pool their resources to buy a house,
said S.A. Ibrahim, president of Green Point Mortgage in
Novato, Calif., and a board member of the California
Mortgage Bankers Association. |
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"The old vanilla Fannie Mae
and Freddie Mac loans basically did not meet the needs of
what is becoming a larger and more significant sub-segment
of the population in the U.S.," Ibrahim said. Included in
that group "are the self-employed, the new immigrants, and
in some instances are ... blue-collar people who work
multiple jobs," he said. |
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The loans also are very popular
with Silicon Valley tech workers, many of whom have worked
as independent contractors in the post-dot-com era, said
Skip Houston of Bankers Mortgage Funding in Campbell, Calif.
When he takes applications from engineers and programmers,
Houston said, "Most times, `consulting' is what someone's
been doing for part of the last couple years." |
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| The loans
also are useful to people who've been out of work and are
starting new jobs. "It's much more difficult to get a
conforming loan approved if you're in a new job and you're
coming off of one or two years' unemployment," said David Herpers, director of consumer affairs for Amerisave, an
Atlanta-based lender that operates primarily online. "It
might be easier to not document your income." |
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Stated income
and similar loans used to carry hefty prepayment penalties
or have significantly higher rates. These days, however,
penalties are less common, and rates are typically just an
eighth- to a quarter-point higher than for a loan with
normal underwriting requirements. Stated income mortgages
are part of a broad category known in the industry as
"Alt-A" loans, which typically require less documentation
than traditional loans. The term denotes "alternative" loans
for customers who have good -- "A" -- credit, but who can't
-- or don't wish to -- provide documentation of their
monthly income, or of their assets. ]
Other loans allow
borrowers to exceed the conventionally debt-to-income
ratios. These are called "no ratio" loans. Alt-A products
have been around for about 15 years, according to the
Mortgage Bankers Association. The group does not track what
percentage of the market is made up of these loans. By far
the most popular of such loans are the stated income
mortgages, experts say.
To qualify for this type of loan,
borrowers typically need to have FICO credit scores in the
mid- to high-600 range, Herpers said. A FICO score is a
credit-risk assessment system developed by Fair Isaac
Corporation, where borrowers are judged on a scale from
300-850 points. Additionally, most stated income loans
require that the borrower have a downpayment or equity of at
least 20 percent of the property's value.
At Amerisave,
applicants for stated income loans are not required to
provide documentation of their income, but the company
verifies their employment when possible, Herpers said. And
the lender also checks that an applicant's stated income is
realistic based on industry averages for that person's
occupation. But it's an open secret in the mortgage business
that some applicants for stated income loans will give an
inflated estimate of their monthly income so that they can
qualify for the loan amount they want. Doing so might allow
them to buy a house in a better school district than they
could otherwise afford, for example. They may reason that
they can afford a bigger monthly payment than traditional
underwriting guidelines will allow them. Or they may be
betting that their income will increase soon. At any rate,
there's a potential risk for both borrower and lender."
Certainly any financial product lends itself to abuse, and
this is not lending that is meant for every lender," Ibrahim
said.
© 2004, San Jose Mercury News (San Jose, Calif.), Sue
McAllister, Dec. 2, 2004. Distributed by Knight Ridder/Tribune
News Service.
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