By David Pilley on October 19, 2011
.jpg.aspx?width=75&height=75) Income verification is something lenders usually like to do before handing out a loan. If they see how much you are making, they will have more confidence in giving you a certain amount of money because they assume you will be able to pay it back in the future. No income verification loans of all sorts do exist, including home equity loans, but they are not suggested for many people. They’re informally called “liars’ loans,” and you’ll soon find out why.
No income verification loans do serve a purpose for some people. They are supposed to be intended for self-employed people or anyone who has a difficult time with proving their income with official documents. A lender will usually look at W-2 forms or income tax returns to verify the income of a potential borrower. Because the self-employed have a lot of tax write-offs, it is difficult for them to show what they make. This is specifically bad for lenders offering home equity loans, as they like to see your net income from the previous two years.
Thus, the no income verification loan was created. With this type of loan, lenders rely heavily on your credit score. They may also require people to verify a certain amount of assets. The verification of an amount of money you already have in your pockets will act as a sort of security if you default on the loan. With a home equity loan, as you should know by now, the collateral is either the equity or the property itself. As another form of security for the lender, a no income verification loan will also have a higher interest rate than a regular loan.
Being self-employed is the only situation where you should consider a no income verification loan. This type of loan is also known as a stated income loan or, in non-financial terms, a “liars’ loan.” While the lender does not verify your income, he/she may ask you to simply state your income, and he/she will have to take you at your word. You can see where this is going. No income verification mortgage and home equity loans are believed to be a large factor in the recent financial crash because so many people had purchased mortgage loans they couldn’t afford with money they never had. Many borrowers embellished the amount of money they were making, and many lenders never bothered to verify the information. As more people defaulted on loans or declared bankruptcy, more lenders lost their incomes, and this resulted in a market crash involving lower property values and a decrease in value of the American dollar.
For some individuals, a no income verification loan is necessary. For most, however, it is not a good idea. You should be able to prove what you have, and never falsify personal information on an official document. The results are evident.
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