Stated-income loans impossible to find

House on mortgage

Self-employed borrowers, even those with a significant income and perfect credit, are still having a tough time getting home loans, according to the Wall Street Journal.

The application process is designed to vet workers with full-time jobs. Anyone who doesn't fit the mold, including small-business owners and professionals like doctors and lawyers, are at a disadvantage.

Their income is considered to be less predictable, and they must use income tax returns to confirm their income because they don't have W-2 forms.

However, self-employed workers often take large tax deductions, including subtracting business expenses from their salary.

They're taxed on a smaller income, but the income listed on their tax return is then less than they actually made, which can make it hard to get a loan.

To solve that problem, many self-employed borrowers with good credit took out stated-income loans, which didn't require much (or any) salary-related documents. (These are also called no- or low-document loans.)

These borrowers put down a considerable down payment, and many also paid a small premium on their interest rates -- around a quarter of a percentage point.

When people were honest about their income, the system worked: The group's overall default level was low.

But during the housing bubble, mortgage brokers steered lots of traditional borrowers into stated-income loans. They took advantage of the system to inflate incomes so applicants would qualify for loans they really couldn't afford.

With an astounding number of these "liar loans" now in default, most lenders have simply stopped offering them to anyone, at any price.

Loan officers say there isn't much they can do about that. But having excellent credit can help you qualify when lending guidelines relax.

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