Stated Income Mortgage Loans: The Downside

2007-03-08 10:33:40

( Financial )



Stated income mortgage loans have recently been introduced to the real estate market. The goal of this type of loan is to open up the market to more people and increase the flux on real estate trading. Stated income mortgages specifically target high risk persons with a history of bad credit, bankruptcy and past foreclosures; and as we know, high risk means high interest rates.

Stated income mortgage loans are also known by the term no income verification mortgage. This is because the income you have stated in order to qualify for the loan does not need to be verified by the underwriters. They take your word for it on the one hand and charge you a high interest rate on the other hand. Stated income mortgages then pave the way for people who are not proven capable of paying loans to enter the real estate market. It also simplifies loans for people who do not want lots of paperwork for a loan application.

This may really sound good to you if you are one of the people planning to take advantage of this opportunity or if you are one of the investors of the residential capital mortgage income fund, but if you take the time to look at it in the long term, you may begin to see the underlying problems waiting to erupt to the surface.

Low income mortgages or no income verification mortgage carries with it the risk of people defaulting on loan payments. Since income was not verified, the debtors may be unable to pay the monthly fees because the income declared in the application may not have been the correct one.

This may mean little to you now but on the whole, real estate prices go up on a steady rise because more and more people are buying. So what happens is you buy a house at a cost more than its actual worth and pay a monthly interest that is sky high. In the end, you fail to pay and your interest rates go up a notch higher. It may come to a point where all your investment and loans you have taken out become useless and you get a foreclosure notice instead.

So to the question of stated income mortgage loans as being good for you, the answer is complex. It is good in the short term for people who wish to be given a second chance and for people who want hassle free loans. But it is bad for everybody in the long-term because of its impact in the real estate market and to you personally who have to pay the high interest payments on these loans.


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