November 26, 2004
Mercury News - By Sue McAllister
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.
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.
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 GreenPoint Mortgage in Novato and a
board member of the California Mortgage Bankers Association.
"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.
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.
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."
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."
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 such loans are the stated income mortgages, experts say. To qualify for such a 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 down payment 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 average's for that person's occupation.
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