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Stated Income Borrowers Watch Out For The………… 4506

Stated Income Loan Programs are very popular Loan Program for Self Employed and Commission Income Borrowers. However, with all the change that have occurred in the Lending Industry, these loans have become more difficult to do. So you may ask, if these loans are more difficult to do these day, why am I doing a post about them? The answer is simple, it is to give a warning to anyone who took out one of these loans, and finds themselves in default today. But main reason for this Post is to advise those who might take out one of these loans in the future.

For those who have one of these loans, you should check to see if one of the disclosures in your loan packet is a 4506 Request For Copy Of Income Tax Return Form. For those who might do one of these loans in the future, you need to understand what a 4506 is, and what you are exposing yourself to when you sign one.

Let me explain, Stated Income Loans are for people who have great credit and make enough income to purchase the house of their choice, but either do not want to, or might have a hard time producing documentation to verify their income. These Borrowers find themselves in a tough situation, because they know they can afford the house that they want to purchase, but producing the documentation to prove it might be a big hassle. Lenders recognizing this dilemma, and developed Stated Income produces to fulfill this need. These Stated Loan Programs require the Borrower to have higher Credit Scores than would be needed for a Full Documented Loan, but in many cases will have a higher Interest Rate. These Stated Loan Programs require the Borrower to state their income on the Loan Application, and sign the Loan Application stating that the information that they have provided is true. So far no problem as long as what was stated was the truth. But a problem could arise if the Lender requires the Borrower to sign a 4506 Request For Copy Of Income Tax Return Form giving the Lender permission to pull the Borrowers tax returns if they should feel the need to. That could be a major problem if the Lender either before or after the loan closes, pulls the Tax Returns, and the Tax Returns do not verify the income that the Borrower stated. This would be fraud, and the Lender could choose to pursue criminal charges against those that they feel provided fraudulent information. Not all Stated Income Loans require a Borrower to sign a 4506, but those that do the Borrower needs to know what they are signing and the consequences if they cannot prove the income that they are stating on the Loan Application. I do not do Stated Income Loans that require a Borrower to sign a 4506, because I will not put myself or my Borrower in a position that could be considered fraudulent in the future.

There are solutions for this problem. Borrowers who truly have the income to purchase the house that they want to buy, but for what ever reason cannot verify it, have a couple of Loan Programs available to them. These loan programs are know as No Ratio, and No Income Loans. These loan programs do not require a Borrower to sign a 4506, because with these Programs a Borrower does not state any income. In the case of a No Ratio Loan the Borrower does not state income, but does state place of employment. A No Income Loan does not require the Borrower to state income or employment, those areas are left blank on the Loan Application.

Both of these Loan Programs usually have a higher Interest Rate than a State Income Loan Programs, because they carry a higher risk. This is because the Lender is taking the Borrower at his/her word, because the Borrower’s Credit Scores and history demonstrate that the Borrower manages his/her finances extremely well, and for a higher cost the Lender is willing to take the Borrower at his/her word. Even though the Interest Rate on these Loans are higher than they are on Stated Income Loans, they are not much higher. And for the slightly higher Interest Rate both the Borrower and the Loan Officer have the peace of mine that they are not signing some thing that later could be considered fraudulent.

Now all of these Loan Programs are for the Borrowers that have the necessary Credit Scores to qualify and who truly have the necessary income to purchase the house. THEY ARE NOT for the people who have the necessary Credit Scores, but do not have the necessary income to purchase the house, and will do anything possible to purchase it, including lying on a Loan Applications. I place a large amount of the blame for this on Loan Officers who have questionable ethics, who many times will suggest these Loan Programs to Borrowers who have no business being in them, and then later find themselves in foreclosure. Foreclosure is one of the times that the Lender will definitely pull the Borrowers Tax Returns. This is a danger especially for Subprime Borrowers. Subprime Lenders allowed for Stated Income Loans with much lower Credit Scores than the Borrower needed for Conventional or Alt A Stated Income Loans. Many of these Borrowers may find themselves unable to make their Mortgage Payment once these loans begin to adjust, and if they go into foreclosure they may have a bigger problem then just losing their house.

There are Stated Income Loans that are truly Stated Loans, and do not require a 4506, but more often than not one will be require. So as I stated in the beginning of this Post, be careful what you sign and know why you are signing it. If you see the numbers 4506 at the top of a form make sure that you understand the ramifications in signing it, and if you can not prove the income that you are stating on the Loan Application, then DON’T SIGN IT.

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Info about the author:

George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com

Posted by George Souto on 10/24/2007 12:57 AM

Comments (132)

stated income

Originally posted at: George's Blog: Stated Income Borrowers Watch Out For The………… 4506

This post has been included in Connecticut Information Middlesex County, CT Information Middletown, CT Information

132 Comments on Stated Income Borrowers Watch Out For The………… 4506

OCT

2007

My spot...be back. Okay...had to go read it...I see Sandra is thinking the same thing! MY GOODNESS...here is George!

You gave a bunch of scenarios for the borrowers here and I learned a few things as well. I had no idea about a no income loan which I need to ask a question on. What kind of borrower doesn't have proof of some kind of income? Even if retired and living off interest/retirement they would still have documentation right?

I understand all too well the other scenarios....the LO's who did not hold any ethical guidelines to their practices and hey...they're out of business here.

The other part is also the client who insists they want that house and don't want to adjust to a townhouse even though warned repeatedly. (I had only ONE client like this and now he's in trouble with his payments 400 dollars more per month) Both the LO and I kept trying to talk him out of it. ....then marital problems during the transaction...it was a mess. (emotionally both of us were drained)

Oh my god - you posted.....second place is mine.

Back - I knew about this! Because we had just had lunch and discussed it...lol. Very timely and important information for every agent to be aware of.

Nice post........I was unaware of these stipulations and now have some concerns on the last three properties I purchased. Appreciate the heads up!! Good info, more consumers should do research or their brokers should provide better information!!!

George... I have always thought it was quite strange and downright insulting the way the financial world treats the self-employed. They always seemed to give you that "second class citizen" feel. Never had any problem with financing since my scores are near the top of the charts but I have had times where I'd break stones because of all the ridiculous paperwork they require.

This is an excellent post. I was told by my loan officer that this form was no big deal, just a formality. Now , learned something.

Sally, the answer to your question is self-employed people with very creative accountants. Creative accounting might some one out of paying taxes, but it is not a good idea when it comes to doing a mortgage. This is a big problem also for people who receive tips and do not report them. Another would be someone getting paid under the table. A legitamit one would be someone with a second job that they have not had for two years. They have the income but it can not be use in qualifying for a Full Doc Loan.

Sandra, yes I did tell you that I had this in a draft. Still don't know if I am completely happy with it, but I had played with it long enough.

Ryan, at this point if you do not go into foreclosure the Tax Returns will probably not be pulled. But it is something to think about should you need to do another loan.

Dan, self-employed isn't a problem as long as you can show the income and do a Full Doc loan. If the person can't and has great credit scores, then a No Ratio or No Income Loan is the safe way to go.

John, a 4506 is not a big deal on a Full Doc Loan, but on a Stated its a very big deal.

George,

Not sure I'm in the same situation...we have an equity lines and when I applied for it they checked the last two years of returns. My wife and I have excellent credit.

Neal, if you gave them your Tax Returns for the last two years then that is not a Stated Loan because you provided proof of income, so you are OK if you signed a 4506.

I would have to check but I believe I did...Ive worked with the same officer and never had a problem.

Neal, even if you did not provide Tax Returns as long as you Stated your reported income correctly you do not have anything to worry about.

I always appreciate your explanations for the mortgage industry. The simplicity is appreciated. I hope you are keeping all of your posts in hard form. You could /should publish them.

Very good post. I know there are mortgage brokers out there that encourage buyers to inflate their numbers. Buyers beware, you could be stepping in quick sand.

I'm with Dena - any other "mortgage blogs" bore me to tears.....you on the other hand - explain these things in a way I get it. You are DA MAN.....once again.

Dena, you always have encouraging words, thank you.

Randy, so very true my friend, and once in quick sand it is very hard to get out.

Ines, thank you for saying that I can always count on you and Dena encouragement and support.

Ines and I are expecting our checks in the mail..................kidding :-)

Dena, shhhhhhhhhhhh you were not suppose to say anything about that ........ LOL

Great information, I was in a stated loan and dont even know if I singed a 4506. Ill know what to look for next time.

Tanny, just make sure that you do not over state your income if you do another Stated Laon and you will not have anything to worry about.

George,

Every borrower who ever plans on taking a stated loan should read your post and keep in mind the tax form that may be there. And learn the small differences between stated, no ratio and no income loans. Good information for loan officers, too.

Esko, thank you. What you stated is very much appreciated especially coming from someone else in the business.

George -Thank you for educating me on 4506, a number I can even remember. A great piece of information to share with consumers. I was just thinking that you needed to post something, so I could learn something new.

George I am surprised that there are still two versions of a no doc loan available .....this is a most interesting post. It would make sense to me that if you signed the 4506 you would think your lender is doing the verifying for you, so you dont have to find your tax returns? Am I right? it's very very interesting.

OCT

2007

George,

Great post! Those stated income loans such as 5/1, 3/1 or option arm that will be adjusting is going to cause alot of problems. Since most of the stated income loans are no longer available and with the value of properties being lower than before, it is going to be a BIG challenge for these borrowers to refi. There is simply little to no equity position so the lenders are quite nervous now. Once these waves of loans passed, our industry will begin to rise again. Until then....it is going to be...

Dave

i ALWAYS WONDERED WHT COMPLETE A 4506 IF YOUR GOING STATED, mANY LENDERS ARE THROWINGIN THE FORM, AND WILL NOT MAKE IT A REQUIREMENT IF YOU REFUSE, AT LEAST THOSE WERE THE OLD RULES

Here in CA, the 4506 is a routine form and a must of stated income loans. when the loan officer does not come to the loan signing appt at escrow. I explain it to my buyers. regards. LUPE from Burbank CA

4506's are pretty standard on any loan. The wholesale lender also loves to catch mortgage brokers or originators who falsify tax returns. Don't kid yourself that this doesn't happen, because it does and has for years. As for stated borrowers, I've rarely heard of anyone getting 4506'd before closing. It's usually when the payments are made that this unpleasant experience begins.

Great post lot of good info here. Thanks for the heads up keep up the great work

Awesome timely post George. Thank you. When my son was purchasing his first home one "lender" wanted him to go stated income because he is self employed. I said "bananas" and had him call someone I am very comfy with. I knew he could document his income through tax returns and bank statements. Why did the other "lender" want him to go stated? Laziness is my only explanation. He heard "self employed" and didn't delve further.

Thanks for the timely post. Sometimes buyers are so eager to buy a house, they sign things without realizing what they are signing.

This is very interesting. As a Realtor, if I were to try to get a loan, it would probably be a Stated Income loan. This is good to know. I will look out for the 4506!

I know that I signed one when I refinanced an investment property. I really appreciated your full explanation. I'm sending this along to a friend who is in the process of refinancing a property currently.

George, Awesome post. So many people don't really understand what stated means and what can happen if they lie. Best one I ever heard was from another mortgage broker that had to tesify in a divorce hearing. Ex-Wive knew that he lied on the mortgage application and overstated his income. Judge held up the 1003 and his tax return and asked which federal document did he lie on? The judge to prove a point made him pay his alimony based on the mortgage application. ouch..

Great information George. There's some good "nitty-gritty" here. Thanks very much.

George:

I have argued your point for years with account executives and loan officers.

George:

This is one of the best posts, I read on this subject and thanks for taking the time to explain this. Just to add, I had a situation just this week with one of my clients. My client is self employed and did not want to hassle with sending his full tax returns. he stated his income on his application, I got a full approval for his loan, with a condition for a 4506 to be signed upfront. Now at first, I was nervous, I thought what if my client is not being truthful. So I call my client and state that I need him to sign a 4506. He then indicates that if he signs one, that he may not qualify. Thats when I had to explain that not providing the documentation was more for convenience and I needed to know his Adjusted Gross Income. It ended up being just fine, and we are doing the loan, but again as you stated, just make sure your client is telling the truth if he signs a 4506, or else he may be committing loan fraud.

George,

You are not kidding about how hard the stated income loans can be. I was in the middle of doing quite a number of 3 and 4 family units when every thing hit the breeze. It was like something came throught the night and took all the air out of everything. I hope that Fannie Mae and Freddie Mac will loosen up a little in the future, but I do understand their reasoning.

Sincerely Yours,

Tom

These Borrowers find themselves in a tough situation, because they know they can afford the house that they want to purchase, but producing the documentation to prove it might be a big hassle. Lenders recognizing this dilemma, and developed Stated Income produces to fulfill this need.

You're sugar coating stated-income, George. In 03/04, what I saw was that 75-80% of the borrowers who wanted to go stated-income clearly didn't have the income to match the claims. The lender I was working with was honest enough to tell them to come back with a tax return.

Of course, they never did. They simply went to another lender, one who would believe $150K income and a 20-year-old Chevy with mismatched fenders.

SI was tailor-made for liars and tax cheats, which is why you're seeing 4506s now.

And I find it just amazing that you're telling people not to lie on their mortgage applications if they carry a 4506. You SHOULD be telling them not to lie on their mortgage applications. PERIOD. END OF STORY.

Wow, I didn't know of such a document. Thanks for the post!

George, I'll be keeping the number 4506 in mind for my SE borrowers from now on. Thanks for the heads up.

That is an amazing post. I had not heard of a 4506 going back and looking at your tax records. I have bought a few homes in my time, but I do not know everything there is to know in the mortgage side. That is why I would call on you to help me.

George thanks for this information.

Very good info. My situation would be another good example. I run my business through my S Corp. I'm paid partly by W-2, partly by 1099 and partly by recoup of investment. Also, since I'm a home based business my s-corp pays some of my expenses in lieu of income. So ststed is usually easy for me.

Although Ron is normally able to use my S Corp income and qualifies like 70% I think. So I guess I go doc without tax returns.

Jennifer, glad the post provided you with information that you found useful.

Carol, to your first question, there are fewer Stated Income programs available right now but this will change when the Industry turns thing around. As far as your second question goes, a Lender will probably not pull the tax returns unless I find a need to. Foreclosure would be one of those times or the income does not make sense, example Day Care Provider who takes care of three kids stating that she makes $100,000, not likely, so Lender might pull the tax returns. So the quick answer to the second question is no they will not verify income on a Stated Income Loan unless they need to.

Dave, that was one of the reasons for writing this Post so that it can serve as a warning to those in the situation you described.

Brett, my experience with Stated Income loans is the opposite of that. Most of the ones we had and have require a 4506 be signed at the time of the application.

Lupe, you do the right and safe thing by explaining to your Borrowers so that they are signing it with their eyes wide open.

Thanks for the information, George. I appreciate your thoroughness.

Jeff

Karl, 4506 are always attached to a Full Doc loan here also, but in that case I have also collected paystubs to verify the income so I am not concerned about the 4506 at that point, but I guess there might still be a possibility that it could cause a problem, can't think of one right now, but I guess anything is possible.

Richard, thank you.

Kris, you are right laziness was the motivation behind some Stated Income Loans, and unfortunately that cost the Borrower money, because they paid a higher interest rate in many cases because of that laziness.

Gita, that is so true, so true.

Karen, I could not imagine you not telling the truth on a loan application, so I do not think the a 4506 would create a problem for you.

Diane, I hope that your friend asks a lot of questions it they are asked to sign one.

Matthew, I love that story and I am going to use it as an example in the future. Thank you for sharing that with me.

Lenn, you have a special way of saying things "nitty gritty" I like that.

Bill, I understand your point. It almost seems like a Stated Income loan that requires a 4506 contradicts the purpose of the program

Gary, you did the right thing, more Loan Officers should be as careful as you.

Tom, they will come back, but for right now they are going to be tough.

Robert, I thing you will be happy to know that I do tell my Borrowers not to lie on a mortgage application period. The purpose of this loan was not to "sugar cote" anything, but to explain what a 4506 is and why it is important to be truthful if you sign one. I would disagree with you that "SI was tailor-made for liars and tax cheats, which is why you're seeing 4506s now." There are many honest people who go Stated Income for various reasons. It is up the each Loan Officer to be more like the Broker you worked for, and make sure that those reasons are honest ones.

Christy, well now you know and will know what you are signing if you are asked to sign one on your next loan.

Brian, your welcome.

Susan, you only need to be concerned about the 4506 if you are doing a Stated Income Loan and are fudging the truth on the Income. Otherwise it should not be a problem.

Bryant, I have FULL confidence that you and Ron handled it the right way, and can back up what ever you put down. That is the way it should be done.

Jeff, you got in there between my comments and I almost missed you. Thank you for taking the time to stop by my post and commenting when I know you have a lot on your mind with what is going on with the fires out there in Southern California. Thank you.

The saddest part is that we lenders are encouraged to 'go stated' on files to make dti work.... by the investor account reps, no less.

George,

Wow! I am sorry I came late to this one :0) Funny thing is, the 4506 was huge as you know in the sup-prime market. I remember when I would hear brokers say, I accidentally sent in a 4506 at closing and then start freaking out! that should have been a sign. Sadly I saw many loans go down the tubes when that 4506 was used. What a Great Post!! It is so relevant to our market right now.

Take Care George,

Tom Weiss

George -- this clarification is so important. I had heard of problems in the past. It is good to know there are options without the dreaded irs form. I have clients from time to time that need this type of product.

Tom, that is when we need to use good judgment and not be talked into something that later will come back to haunt us. I am a firm believer in keeping things on the up and up, that is why I verify the income, even if it is only for my own peace of mind. The only times that I am not concerned about the income is if I am doing a No Ratio or No Income loan, where I do not have to provide a figure.

Tom, well better late than never my friend :)

If they are worried about the form, then it is probably a good sign that they are not telling the truth.

Joan, suggest to them that they mention the No Ratio or No Income Loans to their Lender and see if they have them available to them.

George,

Your right, and it seems to be a great issue when initially brought up. I can't tell you how many Loans I have given up on, because of the Feeling that I was Getting. You are Awesome!! I would hope to see some More Posts Soon! Bubba. :0) You have the great Knowledge that can Help us all.

Tom Weiss

I think the 4506 is a good thing...keep'em honest you know...might've prevented some of the foreclosures we're seeing today.

Good post George!

George,

I too am a firm believer in the 'up & up.

But my point was more about the AEs. They get a hold of a newbie in this business and they can coach them down the wrong path easily.

Unfortunately, even in the places that require licensing, the State talks more about general ethics and statutes than they do about what is right and wrong on a loan.

Ask this question to a group of loan officers: On a stated income loan, do you state just the borrower's income or the household income?

You might be surprised at how many answer household.

Excellent post-you do so well writing about obscure items which are so important!

And I know it's not my post, but I must take exception to what Robert said above. I bought my first house on a stated income loan, since I didn't have two years' full time in real estate yet. The bank did pull my tax returns and they were happy that I didn't lie about anything. It was a great solution for me since I was a mix of W2 and 1099 over the previous two years. I'm not a liar or a cheat and I was willing to pay a higher interest rate to get into a house. Shame on you for accusing George of not being honorable.

Thanks for the info, always good to learn something new that may help our clients.

Tom, my biggest obstacle in Posting more often is time and being a little to picky about what to Post about, but I am glad that people like yourself find them worth while to read when I do Post.

Armando, I agree that it is a good thing as long as Borrowers understand what they are signing and think that they can just put down what ever they want, because it is called a Stated Loan.

Tom, there are always going to be people in every business that try to take advantage of those less informed, that is why it is good to get as much information out there about what they need to look for, and maybe, just maybe some of it will get to them.

Leigh, that is another excellent example of a proper use of a Stated Income Loan. You have the income and can prove it but because of underwriting regulations for self-employed and commission income Borrowers it can't be used, and that two year rule is a biggie. So the Stated Income Loan was perfect in your case. As far as Robert goes, I did not take offense to his comment because I think he was commenting from the point of view of some that he saw this type of program being abused. But thank you for the kind statement that you made about me, I appreciate that very much

Michael, I hope you put this information to good use.

George,

I was only giving you a hard time. I understand where your coming from :0) I think all of Active Rain waits for your Posts! Keep up the good stuff, and thanks.

Tom Weiss

Tom if that is a hard time, I will take it any day .......... LOL

George: Thank you for posting this. I learned something new today and something that I can explain to prospective buyers who may not be aware of this form.

Dianne, it is one of those things that can keep a Borower out of trouble in the future.

George,

Just curious, have you ever seen a case where criminal charges were filed against a borrower? If so what was the end result? I am just curious as I have never run across this before. It would be a great way to explain the seriousness of the situation to a borrower.

Excellent post!

George - i will be back to comment on this post.....

Katie, none of my Borrowers have had to deal with the consequences of this, since I will not do a loan that the Borrower can not assure me that we will not be falsely stating income. But there are departments in my company that deal with foreclosures and they have had to deal with that. I will ask them to give me a couple of examples and what was the action taken against the Borrower.

Diane, I will await your return ......... LOL

Great POST!!

Jay, thank you.

Another excellent post George. Glad to see you back posting again. You must be posting more now because your team is not in the World Series and you have more free time. LOL

Go Red Sox !!!

Jay you better hope that last remark does not come back to bit you in the Buttocks ........ LOL

haha, i dont think i have any worries. but it was definately great to read up on this 4509, lol jk 4506 =]

Jay C, glad to hear that you are safe.

George - I have been told by several reps I have known and trusted for years, all working for major investors this is what is happening.

They will be pulling 4506's randomly -- BEFORE FUNDING - and if the income from the 4506 is 20% under the stated income, they will pull the loan and put your company of the "watch" list........ wow!!!!!!!!

The loans I submit nowadays are about as vanilla as it gets..........

Lewis, that is the first time I have heard that, but I would not doubt it. Thank you for sharing that.

Great post,

I think everyone can take something away from it. We all need to be conscientious about what we do and how it effects others.

My twist on the 4506-T was I didn't want to sign it with the application but it showed up again at closing. Be careful, this will happen. We re-financed with another lender without the form.

OCT

2007

What a super post!! Keep them coming.

Kevin, good point, sometimes we do need to put ourselves in someone else's shoes.

Gary, it the Stated program requires it, it will have to be signed, whether at the time of application or at the closing. But as I also stated before, not all Stated Income Loans require you to sign a 4506, but there are not many of them around. Thank you for reinforcing that.

Great information, I had no idea about 4506, huge implications for buyers who had them.

Tim & Pam, Thank you and I will try.

Christina, it is only a huge implication if they lie. That is why it is so important to tell the truth on all the forms.

Cheryl, yes I do know what you mean by all the loans out there. I am a Loan Officer and my company provides training all the time, and it is still hard for me to keep on top of everything. In fact there are loans out there that I still don't completely understand how the work, and probably some that I also have not heard about. But what is important is, the the programs that we know about and do, that we should know all the do's and don't's about them. And if we all share our knowledge, as many of us do on here, then we will all be a little better prepared for the next loan that we do, or the next house that we sell.

I have done a few of these loans and you do end up paying for them with the higher rates, I wonder how long they will continue?

Scot, I would have to think that some of them will continue, but just become tougher to do. There is a need for this product and people who legitimately qualify for it.

Good post. Interesting. Thanks for sharing.

Bob & Carolin, thank you for stopping by and commenting.

Hi George! I finally made it back to comment! First off, I too was waiting in anticipation for a post from you.... I kept watching on my subscribed list and was not seeing your face pop up at the top! NOW it has arrived! YEA!! (You have been so faithful and loyal in posting a comment to just about everything i slap up! LOL!)

First of all, i appreciate the care and prayers you've sent my way in my concern for my son in the wake of the California Fires.... Thank you George for your love and support. (Son is fine... i did update the post)

NOW... I am GRATEFUL for this post and had many questions i was curious about.... some were:

Is going stated the same as "no doc" ???
Will the 4506 no longer apply if the loan transferred to a different lender?
When doing a re-fi, are there instances where the 4506 is necessary also?
We went (what i thought was stated) years ago, but we produced 3 yrs of bank statements in lieu of W-2's - was that still considered stated?

George, I'm SO GLAD you created this post and am looking forward to hearing your expert answers. Thank you in advance!!

Diane, glad you made it back. Here are the answers to your questions, given the information you have given me.

No, because you will probably still have to provide bank statement to show that you have enough money for downpayment and closing costs.
No, the 4506 follows the loan.
Yes, a 4506 is required on all loans that are not No Ratio, No Income, and a few Stated Income Loan.
My best guess on this one is No, because they probably requested the bank statements to try to determine your income for those three years, and the bank statements needed to justify the income needed to do the loan.

Hope this helps.

Glad that everyones prayers were answered and your son is safe :)

Good post and good reason not to do too many stated loans unless you know that the buyers can truly afford their payments, its just about being ethical.

Christopher, you got it. If you are honest and ethical in what you do, no problems. But if someone isn't then they deserve to be caught.

OCT

2007

George, you answered my questions very thoroughly, and with proficient professionalism! Thank you - Now, with the no doc a client does not have to show proof of income, right? Same as stated... and the difference being that one has to show W2 and the other, no?

Guess i need to sign up for your classes?

Mortgage George...

92 comments later and there's not much left to say :)

How about ... Love to see you stamping out FRAUD :)

TLW...ROAR!

WOW 93 comments? crazy! haha...this is a great post though. You make some very important points in here that will be important for the future. Great blog George. I'm glad to see that you finally posted again!

Diane, I would make a terrible teacher ...... LOL. Now on to your question, the No Doc loan programs that I am familiar with mean just what the name implies No Documentation especially no W2's, however, some of the No Doc loans still require you to sign a 4506.

TLW, that would be a great goal to have, maybe we could try to do it together.

Rick, thank you. As far as Posting more often, I Post as time permits, and as you well know business comes first :)

OCT

2007

Great info, but if someone didn't have anything to hide, why would they object to signing a 4506 form? It just seems to me that too many people don't want to jump through the hoops that self employed people had to jump through in the past. Great post!

George, I think I've figured out the key to your success. Love ya!

Paul, if they don't have anything to hide than like you said signing a 4506 is not a problem. But the problem happens when they are not telling the truth and the Loan Officer does not fully explain what they are signing when they sign the 4506. The second problem is similar but it happens when the Loan Officer does explain the 4506 but the Borrower still does not tell reveal the truth to the Loan Officer and still signs it anyway.

Dena, I am happy that one of us has figured it out. Now how about you share it with me ....... LOL

OCT

2007

This was helpful information that I am glad to be privy to in case I am working with clients who need to do a stated income loan. Great Post! And thank you for all of your support on my blogs :)

Bridget, thank you and it has been my pleasure to read your blogs.

Thanks for this information. Active Rain truly is a source of information of something I did not know before nor was trained on properly.

Matthew, it is something that would probably not come up in training on this loan product and you would probably never know about the 4506 being needed for it, unless the Lender you for has you collecting all need disclosures with the 1003. Some Lender the Loan Officer is only responsible for taking the 1003 and a processor takes over from there, or taking a 1003 having it signed and collecting documents like pay stubs and bank statements, but then a processor sends out the disclosures. If you are not the one having the Borrower sign all the disclosure, then you would probably not have any reason to ask why you needed to have a Borrower sign a 4506 on a Stated Income Loan. The company I work for makes us turn in a complete loan package, 1003, and all needed documents and disclosures. When I see something that seems to contradict what I think I am doing, I am able to ask why and get the explanation.

George, in regards to the 4506 I was asked to sign the form (or should i say DOC) during the purchase of a rental property a couple of years ago. I decided to take advantage of a "no doc" loan for ease and ability to purchase in a timely matter. The broker slipped in the 4506 both before and at closing, I pointed this out to my closing attorney and refused to sign due to the fact that this was a "no doc loan". I questioned my needing to sign, not that had anything to hide but instead the fact of the matter. I was paying a premium (inc greater points, int rate and dwn payment) for this type of loan and yet was told to sign such a "doc"..? Well, the broker finally waived the form due to my calling such attention to it (or my tempting not to close) and all was well, however I cant stress enough that everyone should "look" at each form they are being asked to sign, right down to closing!

John, good move on your part, but I bet that Broker got into hot water with the Lender that he was placing that loan with for not having that disclosure. "No Doc" simply means that you do not have to provide pay stubs, bank statements, W2's, tax returns, and other documents like that. A 4506 is considered a disclosure form just like other disclosures forms that you probably had to sign like a Good faith Estimate, Truth in Lending, Rate & Point Lock Letter, to just name a few.

My underwriter would not even process that loan unless I had turned in a 4506 with it. It would sit on her desk until I got one signed. So consider yourself lucky, but at least the next time around you will know to ask whether or not that will be one of the disclosure forms that they will want you to sign before the Closing and not have to go through that again.

I have gotten loans using stated income. I was always amazed that lenders allowed a borrower to just say what they made and accept it.

My stated income loans have gone like this:

Other person: "Carole, how much money do you have?'

Me: 'I'm flat broke'

Other person: 'I'm sorry, here's forty bucks'

:=)

Vickie, you are right it is amazing, but the way that they have looked at it in the past is that if you have Credit Scores in the high 700's that you mange your finances real well and therefore they will take your word that you can afford what you are trying to buy. I have even seen Stated Income loans for Credit Scores in the low 700's, and during the hay day of Subprime you could get one even if your Credit Scores were in the 600's.

George, well that certainly explains it.. and have learned so much just reading the many comments here.. Thank you!

Carole, your to funny. But if you don't mind giving me the Loan Officers name, I would love to see if he would give me $40 if I told him that I was broke ......... I could use the forty dollars :)

John, thank you for saying that, I appreciate it.

I'm going to make both of you stand in the corner :) Peace out!

Dena, come on I just got out of the corner and it was lonely there ...... I don't want to go back :)

Dena, NOW George tells me the word 'lender' should have been after his name. I think 'shark' was on the nametag :-)

OCT

2007

Carole, but it was a "Shark" with forty more dollars than I have ............... LOL

NOV

2007

Good post - George. We require a 4506-T on every SI loan for a different reason than simply to look at the income. We do not use the AGI from taxes on stated loans. In fact, on stated loans we even use the credit report itself as a measure. For example if a self-employed borrower states they earn $200,000 per year and have only a couple thousand dollars in the bank but their monthly combined debt is $3000 that is a flag that must be overcome. We understand that many self employed borrowers may use income from their business which is never shown as income to pay their bills. All of these are reasons stated income loans have a higher cost - because they are higher risk. However, here is what even brokers tend to forget: It's the lender's butt. It's the lender's money. We don't mind stated income - we do, however, discover and prosecute mortgage fraud including falsely inflated income and we don't need a 4506 to do it. However, that's a nice little document to have if it's ever needed. Your best line in the post "if you can not prove the income that you are stating on the Loan Application, then DON’T SIGN IT."

Ken, thank you for that added information and it makes complete sense to me. I know that even after a loan has been underwritten and closed with my company, it then goes to Quality Control and it gets taken apart there also. If our Quality Control person finds something that the Underwriter missed or a red flag that she should have checked into, that Underwriter is talked to and warnings given. Also at this point the whole loan could come into question especially if fraud is suspected. I don't know if they use some of the things you mentioned, but you have gotten me curious about that, so I think I will ask the next time I go in. Thank you again for the valued information that you provided.

NOV

2007

If you look at the 4506, it generally doesn't ask for past returns, only for future ones. It has to do with the ability to sell the note in the secondary market via the federal pipeline. If the form is blank as to the periods requested, the form should NOT be signed until completed. What you claim to have made last year or this is of no relevance to what you make next year or the year after, but it does have an effect upon the ability to package and sell the loan.

C. Wesley Grady, Esq.

Wes, when the 4506 is signed at the time of the loan application the dates that the tax returns can be requested are filled for the past three years. So any 4506 form that I had signed this year (2007), the Borrower is giving my company or the investor that we sell the loan to, permission to pull the tax returns for 2006. 2005, and 2004.

A Borrower on a Stated Income Loan is stating the Income that they have made, and not the income that they expect to make in the future. So the purpose of the 4506 form is for the lender or investor to verify the past income that the Borrower claims to have made.

You are absolutely right in advising a Borrower to NOT sign one that is not completed, as well as any other form that is not completed. The Borrower should also insist on getting a copy of everything they signed.

As a closing attorney for the loans, I only see the 4506 that is in the closing file, and those are generally for the succeeding three years.

Wes

Wes, I guess then they cover all the bases. Thanks for adding that comment.

I see this form (4506 and 4506-T) in most of the loan closings I perform, both refinances and purchases. It is only valid for 60 days from the date it is signed, so you should make sure you date the form as well as ensuring the tax years are completed. Some lenders request that you not date the form.

I have been told that lenders use the form as a random quality control procedure to verify that the income shown on the 1003 is correct. The form can be submitted by the originating lender or by the new servicer, as long as it is within the 60 day limit.

NOV

2007

Teresa, as you pointed out there are several times along the loan process that the 4506 could be used, whether by the Underwriter, Quality Control, or by the new servicer of the loan if it is sold on the secondary market after the closing. You are also correct on the 60, but as you pointed out the 60 days starts from the date on the form, and many times these forms are not dated or the years that they are going to request them for filled in at the time the Loan Officer does the Loan Application. Furthermore, I was told by our Subprime Vendors that it was common with Subprime loans for them to pull tax returns if the loan went into foreclosure.

George, just pointing out that the instructions on the form itself say that it is not valid if submitted more than 60 days from the date signed. As consumers (borrowers) we should all be aware of the power we are giving the lender when we choose not to date this form. As I recall, it has been the riskier subprime loans that included specific instructions for the borrower not to date the form and included a form for the borrower to sign acknowledging they were not dating the 4506.

I would never advise a borrower at a loan signing not to sign this form or to date it when the lender's instructions say otherwise, as that is not my role at a loan signing. I would, however advise my friends and relatives to be wary of a lender who requests or requires that they not date the 4506.

What a great post. I will be sure to relay this message to any one who's looking for a stated income loan. Wouldn't want the deal to die at the end. Thanks for sharing.

Teresa, your comments have been a welcomed addition to this blog, you have made some excellent points and yes a Borrower needs to be very careful with a Lender that wants you to sign a form that is not filled in and dated.

Vincent, no one wants to be a part of a transaction that blows up at the end. Thank you for stopping by.

NOV

2007

George,

Very well explanation about the 4506 and the No ratio / No income loans programs, etc :) Well done !

Ray Saenz

Ray, thank you, I value and appreciate your opinion.

NOV

2007

Cheryl, I do see what you mean and I agree. The Borrower was the one that made the choice and they need to be responsible for that choice. But the Lender was responsible for providing that Borrower with all the information that they needed to make a responsible decision, if they did, the the Borrower has no one to blame but himself, if the Lender didn't or gave false information then they need to be held accountable for their actions.

NOV

2007

If a borrower makes the money but cannot prove the income and goes Stated Income then it seems like they will get in trouble anyways. This is all a setup by the banks! They just want to have something against the brokers and or borrowers. I heard of a case that a lender caught a broker doing fraud but the broker was not cut off by the lender, instead the lender asked him to give them more deals. Lenders offer these programs, not the brokers so the regulators should stop the lenders and stop blaming the borrowers and the brokers. The reality is that money needs to be lend by these lenders and they do not care as long as they have something against the borrowers or brokers. They know that stated loans are risky.

SolidDays, I will agree with you on one thing that banks "know that stated loans are risky." That is why it is important for everyone to be honest in this process.

I disagree that this is somehow a set-up by the banks to have something against the Brokers and Borrowers. It isn't the Lender that is not disclosing to the Borrower what they are signing when the sign a 4506, it is the responsibility of the Broker or Loan Officer to do that. It is not the Lender that is over stating income that they cannot prove, it is the Borrower, and yes maybe even the Broker or Loan Officer doing that as well.

Rules and regulations are in place for a reason, and if everyone follows them no one gets in trouble. Unfortunately there are always those that do not think that they will get caught and try to beat the system.

If Brokers and Loan Officers explain to the Borrower what they are signing and the Borrower still over states his income, whose fault is that?

If the Broker or Loan Officer does not explain to the Borrower what they are signing whose fault is that?

If the Broker or Loan Officer knows that the Borrower cannot prove their income and still state the figure, whose fault is that?

If we all tell the truth we don't have to worry about whose fault it is, and no one gets in trouble.

DEC

2007

George- You continue to keep us up-to-date on new developments with your brillant writing, and force us to look seriously at and face the challenges of our industry.

Eloise, thank you for that comment. If we all share what we know then we might be able to avoid some of the pit falls in this Industry.

APR

Hi, this blog is fantastic! I have a question for you guys. My sister's ex-husband is buying a house that he can afford but he gets paid cash for "free-lance" work in addition to his day job. His is not using SI. He's going with full doc and a w-2 from his day job to get the best interest. We think he's using a fake tax return, if that's possible. Is there a chance that they will catch him?

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