Comparing Stated Income Loans to Full Documentation Loans

Most residential and commercial loans can be categorized as either full documentation or stated income loans.  The differences between the two loan types, though few, can have a great effect on everything from interest rate, payment amount, and length of the loan.

The major difference between a full documentation (Full-Doc) loan and a stated income loan lies in the ability of the borrower to verify their income.  Income is generally the most important piece of information on a loan application as it tells the lender the borrower's ability to repay the potential loan.

Full Documentation

A Full-Doc loan is one in which the lender collects information allowing them to verify the income of the borrower.  In situations where the borrower has held the same position for two years or more they can verify their income by providing tax returns (IRS Form 1040) and W-2's.  These forms are regularly accepted by all lending institutions.

For those borrower's who have held their jobs less than two years they will be required to submit a letter from their employer verifying the date they started working and the amount of salary they receive on a monthly or yearly basis.

This information is usually confirmed with a phone call from the lender to the human resources department of the borrower's employer.

By verifying the borrower's income, the lender can feel secure knowing the borrower has a current and continued source of income with which to repay their loan.  For this reason, a full-doc loan is considered to hold the least risk for the lender.  As such, a full-doc loan usually offers the lowest interest rate and longest amortization.  In turn, a borrower with a full-doc loan will usually have a lower monthly payment.

Stated Income

Stated income loans are loans in which the borrower "states" their income on the application. The lender simply takes the borrower at their word and does not bother to verify it by any means.  These have come to be known as "liar's loans" because many borrowers have misstated or inflated their income just to qualify for the loan they desire.

Borrowers with irregular income or income that cannot be documented, such as seasonal workers, or those who are paid in cash, are the most likely candidates for stated loans.  These are borrowers who can't provide tax returns or any other documentation by which their income can be verified.

Stated income loans are considered more risky for the lender because the there is no guaranty the borrower has the means to repay the loan.  As such, stated income loans typically carry with it a higher rate of interest, a higher required down payment, and a lower amortization period.  These quickly add up to spell a higher monthly payment for the borrower who has no option but to use the stated loan product.

Generally speaking, lenders believe that regardless of income, borrowers with higher credit scores have a higher likelihood of repaying loans. Due to the higher risk factor of stated income loans, lenders therefore require a minimum credit or FICO score for borrowers wishing to apply for these loans.  In some cases, the lender requires a higher credit score for stated loans than they do full documentation.

Whenever applying for a loan, always ask the loan officer or broker to confirm exactly which documents are needed to qualify for each type of loan.  With simple income verification, a borrower who would normally have to "go stated" can make the move to full-doc and get much better terms, potentially saving them thousands of dollars over the life of their loan.