What Is a Liar Loan?
Let me explain what a liar loan is: it's a mortgage that doesn't require much, if any, documentation of your income or assets. Lenders just take your word for it without checking W-2s, tax returns, or other records, which is why they're called 'liar loans.' Stick with me as I break down how they work and their implications.
Key Takeaways
You need to know that a liar loan is essentially a mortgage with low or no income and asset documentation. These were created for people who struggle to provide paperwork, like those with irregular income. However, they fueled the 2007-2008 financial crisis. Before that, rising property values led brokers to promote them, resulting in many unaffordable loans. Now, thanks to reforms like Dodd-Frank, lenders must thoroughly check your repayment ability.
How a Liar Loan Works
In certain low-documentation loans, like stated income/stated asset mortgages (SISAs), you note your income and assets on the application, but the lender doesn't verify them. With no income/no asset mortgages (NINA), you don't even have to disclose that information.
Some take the form of NINJA loans—no income, no job, no assets—which invite unethical practices from both borrowers and lenders. They've led to people taking on loans they couldn't handle, ending in foreclosures.
Originally, these low-doc and no-doc loans targeted borrowers who can't easily produce verification paperwork, perhaps from tips or self-employment. They're meant to help those with nontraditional income become homeowners. For instance, if you're self-employed, you might not have steady pay stubs.
These mortgages often fit into the Alt-A category, relying on your credit score and loan-to-value ratio to assess repayment ability.
Remember, liar loans can open doors for property ownership if your income is unconventional, but they've been abused historically.
How Borrowers and Brokers Use Liar Loans
These loans earn the 'liar' label because they allow for exaggeration of income or assets by borrowers, brokers, or officers to qualify for bigger mortgages that wouldn't otherwise be approved.
Their widespread use contributed to the 2007-2008 financial crisis and housing bubble, with estimates of $100 billion in losses, or 20% of total crisis losses.
Borrowers got approved for loans beyond their means, and some brokers pushed them amid rising real estate values, leading to speculation and defaults. People with no repayment intent even bought homes.
Post-crisis, the Dodd-Frank Act introduced rules requiring lenders to reasonably determine your ability to repay any dwelling-secured loan.
Frequently Asked Questions (FAQs)
Is lying on a loan application illegal? Yes, if it's intentional, you could face criminal charges and even jail time.
What happens if you lie on a loan application? The lender might reject you if they spot the falsehood. If you've already gotten the funds, you could have to repay everything, and in some cases, face jail.
Are stated income loans illegal? Today, yes—loans where you just state your income without proof are not allowed.
The Bottom Line
To wrap this up, a liar loan is one where the lender skips proof of your financial qualifications and trusts your statements. They were common in mortgages but led to issues, so now lenders must demand solid evidence of credit score, income, and more to approve you.
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