3 Reasons Stated Income Home Loans are Risky

Over the years, lenders have used stated income home loans to finance mortgages for those with questionable incomes. With a stated income loan, there is no formal verification of your income. Therefore, as long as your credit holds up, you should be able to get the loan that you need even if you don't have a regular form of income. While they can be beneficial, they are not without risks. In fact, stated income home loans are some of the riskiest forms of mortgages. Here are a few things to think about.

1. No Ratios

Traditional lenders have many ratios that are designed to aid in their lending decisions. These ratios are based on historical data and previous mistakes. With this previous data, they have developed some very accurate guidelines to help them determine when someone has enough income for a house. If your debt is too high or your income is too low, they will not lend you the money. They have determined that outside of these thresholds, they have determined that you are less likely to be able to afford your mortgage over the years. If you get a stated income loan, you are negating all of this knowledge that is designed to protect you.

2. Increased Default Risk

When you throw all of the ratios and guidelines for income out the window, you are putting yourself at an increased risk of default. A recent study found that the vast majority of people using stated income loans lied about their income on the application. If you do this, you are putting yourself at an increased risk of default on the house. Losing a home to foreclosure can devastate your credit report. A foreclosure will stay on your record for seven years and lenders will never look at you the same way again. You will have trouble securing another mortgage in the future.

3. Higher Interest Rate

When you use a stated income loan, you will undoubtedly have to agree to a higher rate of interest. When the bank is willing to take you at your word about your income, they are taking a great risk. They want to be compensated for that risk by getting more money. If you are asking them to take a risk, you better be prepared to pay for it. When you pay a higher interest rate over the course of 30 years, you will be throwing away thousands of dollars during that time period. When you pay more money than you should, you are actually hurting yourself in other ways as well.

You will be missing out on the opportunity of investing that money and gaining interest on it. Therefore, you are not just losing the extra money that you gave the bank, but you are missing out on the interest income on the money as well. Over the course of 30 years, this will amount to an unbelievable amount of money.