The many flavors of mortgage loans

By: Jessica White/DC Columnist

Posted: 4/8/07

Dear Ms. Mortgage Maven,

I have heard a lot about stated income loans lately, in connection with the turmoil in the subprime market. I also heard of no income loans. Are these the same thing? What is a stated income loan and who would want one of these loans if they are so risky?

Thanks!

Charissa

Dear Charissa,

The range of loan products available to consumers is shocking. It may help to look at types of loans as flavors of ice cream. The plain, standard staple of all ice cream shops is vanilla. In loan terms, vanilla would be a full documentation loan amortized over thirty years.

Full documentation loans are just that - every bit of information you declare on your loan application will be documented, especially if it has a number attached to it (think income and asset figures). Your income from your employer, all your assets in all your bank accounts (assuming you need to list all of them to qualify), the money in your retirement fund, any other type of income or asset (boarder income, dividends, gift funds, etc).

These types of loans come with the most attractive interest rates for qualified borrowers. I have seen borrowers get Fannie Mae loans for 100% financing with credit scores as low as 560. In ice cream terms, vanilla is not laden with calories or risk. You know what you are getting no matter what brand of vanilla it is, you know you will like it. It's vanilla, after all. Not the most exciting, but certainly the most well-known and predictable flavor around.

But say you are self employed as a consultant, contractor or small business owner. (Currently, wage earners are even allowed to do stated income loans.) This group of applicants generally does not want a vanilla loan because all the documentation involved (two years of business and personal taxes, all schedules, for example) gets cumbersome and the income calculations used for tax and loan purposes can be at odds with each other.

This group generally wants to do a "stated income" loan, which can include verifying or stating assets as well. Stated income loans generally require a credit score of 660 and, after the shake up in the subprime market, 100% financing for this group has disappeared, so borrowers in this category can expect to put at least five percent down payment on a purchase.

Look at this type of loan as a fudge swirl. It is a little more exciting than vanilla, and a little more risky. Maybe you will like it, maybe you won't. In ice cream terms, a fudge swirl has more calories (and in loan terms a higher interest rate), is not as well-loved as vanilla, and maybe does not suit everyone's palate.

No-income loans take it a step further - borrowers are not required to even "state" an income. Qualified borrowers can take it a step further and do a "no income, no asset" loan, meaning exactly that - there is no income and no asset information on the application. This option is only available to borrowers with flawless credit and can require around a thirty percent down payment.

I would consider this the gourmet chocolate ice cream with large chocolate chunks - it is for those who can really afford the calories and want a rich, decadent ice cream.

People in this category just want to be left alone to enjoy their ice cream - they do not want anyone bugging them about calories or telling them they should not eat it. Nor do they want anyone bothering them for documentation. They have flawless credit and a sizable down payment. And they are willing to pay a higher interest rate (or consume more calories) than the folks who just chose vanilla.

And FYI: a lender cannot tell a borrower that s/he has to "state" his or her income and tell the borrower what that income should be to qualify for the loan. The borrower has to tell the lender s/he wants to do a stated income loan, and the borrower has to state his or her income. Anything else is fraud.

And now that I have answered your question, I think I have some cookies & cream in the freezer!

Jessica White, also known as "Ms. Mortgage Maven," is a mortgage lender for a national bank in Fort Washington, MD. Call her with your questions 202-607-4449 or email her at Jessica@msmortgagemaven.com and you may get your question answered in this column. You can also apply online at www.msmortgagemaven.com.