Are Stated Income Loans Illegal?
Are stated income loans illegal? One of the many causes of the phenomenon known as the “housing bubble”, (1) was the stated income loans (2). To deal with the collapse of the housing market, the Obama Administration passed the Dodd-Frank Act (3) which prohibited the institute of the aforementioned loans where the condition of eligibility for the borrower was the formal declaration of his will and ability to pay the contractual obligation (4). However, some years ago, this Act was partially dismantled (8) by the S.2155 (5) that rolled back a good part of it (6) without actually repealing it (9), because of the severe problems it was generating to our country (7). As a consequence thereof, we can say that stated income loans are back, but with variations that we will explain easily based on the new reforms (10).
So today, after these reforms and rollbacks, are stated income loans illegal?
Stated income loans are illegal now only for owner-occupied properties after the Dodd-Frank financial reform was passed in 2010. Therefore, they are legal for real estate investment because in these cases, the borrowers are not purchasing owner occupied property.
Thus, it is now illegal for any prospective borrower to obtain a stated income mortgage loan for an owner-occupant property. However, they are allowed in the case of borrowers purchasing a real estate object for investment purposes that will not be occupied.
Today, stated income loans require proof of income, but you can use bank and financial statements to prove your ability to pay.
You cannot buy a house for living without proof of income, as this is prohibited now. Today’s stated income mortgage still requires you to prove your income, but you can do so with bank statements rather than traditional documentation, such as W-2s, pay stubs, and tax returns. We discussed in another article, how is the situation in California regarding the non-QM market in this article.
They come in various names (e.g. “no-doc”, “low doc”, “SISA”, etc.) Depending on the state, current regulations, and even to the extent of the uniqueness of a population’s needs, stated income loans can be quite flexible, thus offering a viable choice for those with equally unique financing needs.
What Legislation Made Stated Income Loans Illegal?
The legislation that made stated income loans illegal was the Dodd-Frank Act, partially rolled back in 2018 during the Trump Administration.
The recommendation is to prepare a range of bank statements covering not less than a timeframe of six months