The phrase liar loan is informally called state income loans, often called no-doc loans. Since a liar loan is secured by collateral, it does not require evidence of income, much like a mortgage. Additionally, applicants can declare their income on the loan application when they apply for a liar loan. However, the borrower’s income is not confirmed by the lender. Salary statements or other documentation proving one’s income are optional.
Furthermore, it’s helpful for those who do not want to give lenders critical information about their income or for borrowers who are self-employed and cannot produce pay stubs. In Switzerland, loan or mortgage approval is contingent upon the borrower’s ability to pay. However, Swiss lenders do not provide liar loans.
What is Liar Loan?
One type of mortgage loan that needs little to no proof of assets and income is called a liar loan. The initial purpose of low-documentation and no-documentation loans was to assist borrowers who were having trouble supplying the necessary documents to prove their assets and income. These loans only takes the borrower at his word without checking documentation to confirm income and assets. This includes W-2 forms, income tax returns, or other
Additionally, one of the main causes of the financial crisis in 2007–2008 was these loans. Furthermore, brokers were encouraged to sell liar loans before the financial crisis. This is due to a notable increase in property values, which many customers discovered they could not afford. Lenders are now required by regulatory measures like Dodd-Frank to thoroughly evaluate their capacity to repay a house loan.
How Does Liar Loan Work?
Certain loans that need little documentation just require the loan applicant to list their assets and income. This includes a stated income or stated asset mortgages (SISAs). However, with no income or no asset mortgages (NINA), you are not even required to reveal your income or assets to the lender. A few types of liar loans are called NINJA loans, which stands for no income, no job, and no assets. These lending schemes have been misused in the past and provide room for unethical activity on the part of dishonest lenders and borrowers.
They have caused borrowers to take out loans that they are unable to repay, which has put them in danger of going into foreclosure. Both little and no documentation loans were initially intended for borrowers who struggle to provide documentation. This includes previous tax returns, to prove their income and assets. Alternatively, individuals might make money from unconventional sources like tips or a side gig where such paperwork isn’t available.
The goal of low-doc and no-doc loans was to enable people and households with unconventional income streams to acquire property. For instance, self-employed people may not get a constant paycheck and rarely receive monthly pay stubs. Mortgages with less documentation often come under the Alt-A loan category. To assess a borrower’s capacity to repay, Alt-A financing primarily relies on the borrower’s credit score and the loan-to-value ratio of the mortgage.
How It Led to the Financial Crisis of 2008
Although they were widely available, liar loans caused issues. Typically, these loans served as a major contributor to the 2008 housing crisis. The primary cause of the 2007–2008 financial crisis was the gradual decline in housing values, which went unnoticed at first. Additionally, banks were providing loans to a large number of individuals without thoroughly checking their documentation or source of income. This is known as liar loans.
Because they made it easier for borrowers, mortgage brokers, or loan officers to fabricate information about their income, assets, or both to qualify for a larger loan amount. Therefore, they lied about statistics to get low or no documentation. This allowed them to sell a property that would not have been authorized otherwise.
What Happens to Liar Loans
One of the reasons lenders interrogate applicants is to evaluate their capacity to repay a loan. Lying on a loan application form may lead to a lot of issues later on. Moreover, the loan application will probably be denied by the lender if they discover that the applicant misled them on it. A homeowner may be granted a loan that they are unable to repay. This is if the lender authorizes the loan without realizing that fraudulent information has been provided.
Furthermore, both their credit rating and any assets over which the lender has a security interest will be jeopardized in the event of a loan default. Instead, when the borrower provides facts, the lender believes them when they say so. Mortgage lenders used to frequently provide liar loans. However, they have stricter requirements for verification that the applicants meet their income, credit score, and other requirements.
FAQs
Is Lying on a Loan Application Illegal?
It may be illegal to lie on a loan application, particularly if the falsehood is deliberate. In addition, lying on a loan application might land you in prison.
What Takes Place if a Loan Application Is Lying?
If the lender finds out that the information you provided on your loan application was fraudulent, you may not be approved for the credit. However, you can be required to return the full amount if you get cash for the loan and the lender later finds that you provided inaccurate information. Lastly, depending on the situation, lying on a loan application may result in jail time.
Are Stated Income Loans Illegal?
These days, stated loans, or loans for which you do not have to show proof of income, are illegal. If all you include on your loan application is your income, it’s known as a stated loan.
