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"Liar loans" is a term used for low-or-no-documentation mortgages. As the connotation behind the name suggests, these mortgage loans carry a significant amount of risk. However, when used properly, they can be a useful tool to help investors grow their portfolios. With that in mind, we've covered the basics of liar loans below. Read on to learn more.
What are liar loans?
At its core, a liar loan is another name for a stated income loan. When working with a stated income loan, the mortgage lender does not verify the borrower's income or assets. Instead, the loan originator simply underwrites the loan based on the information the borrower provided on their mortgage application.
Originally, stated income mortgages were meant to be used for self-employed borrowers who had trouble coming up with the necessary documentation to qualify for a conventional loan. However, these mortgages were widely misused during the financial crisis. To put it simply, mortgage lenders gave countless borrowers loans that they were unable to afford, which resulted in the creation of a housing bubble and, eventually, mass foreclosure.
Following the financial crisis, there were widespread regulation changes in the mortgage industry. As a result, these stated income loans are no longer very common. These days, padding the information on your mortgage application to enable yourself to qualify for a bigger loan is considered mortgage fraud. Additionally, your mortgage lender will more than likely ask for financial documentation to back up the information you provided.
How do liar loans work?
Traditionally, liar loans are heavily dependent on your credit score. Since these loans ask for very little documentation, your credit score often serves as the main indicator of your ability and willingness to pay back a mortgage loan.
That said, depending on what type of loan is ultimately chosen, there may be some minimal underwriting done before you receive loan approval. For example, with a no-income-no-assets (NINA) loan, the loan officer will often take the time to verify your employment. However, with a no-income-no-job-no-assets (NINJA) loan, income verification is not necessary. In fact, you don't need to have any income coming in at all in order to qualify for one of these loans.
As you might be able to guess, NINJA loans were the main culprit of subprime lending during the financial crisis.
What are the pros and cons of liar loans?
Now that you know a little bit more about liar loans and how they work, it's time to take a look at the pros and cons behind these unconventional loans. With that in mind, we have laid them out for you below. Take a look over each one to find out whether or not this type of mortgage loan might be right for you.
The biggest benefit of liar loans is that it's easy to qualify. Essentially, all you need to do is fill out a loan application and submit to a credit check. Particularly for self-employed borrowers, who don't have traditional pay stubs or W-2s, going this route can be much easier than applying for a conventional mortgage loan.
Unfortunately for borrowers, taking out this type of home loan comes with a vast amount of risk. In this case, whether you mean to do it or not, if you overstate your assets on your loan application, you could end up getting approved for a loan that you ultimately can't afford. If you can't afford your payments, there is a significant risk of defaulting on the loan and eventually facing foreclosure.
Additionally, it's important to note that the streamlined application process for a liar's loan does come at a cost. Typically, these loans come with much higher interest rates than your traditional mortgage loan. The higher interest rate is meant to compensate for the higher default risk, but on your end, it would mean a higher monthly payment.
How can real estate investors use liar loans to their advantage?
in today's mortgage industry, stated income loans aren't available to traditional homebuyers. They are, however, available to borrowers who are looking to purchase investment properties. With that in mind, if you're willing to take on the risk, you may be able to use these unconventional loans to your advantage.
In particular, many investors will use this type of loan as a sort of cash advance. For example, fix-and-flippers might use it to finance the renovation stage of their flip and then pay off the loan when the property eventually sells. Essentially, it can be used as a way to borrow money while preserving your cash flow.
The bottom line
Above all, it's important to recognize that taking out a liar loan does come with risk. If you're going to go this route, you need to make sure you have a firm handle on your ability to repay the loan. Additionally, you need to make sure you work with a reputable lender. However, all that said, when used properly, these loans can be a useful tool to help investors grow their portfolios without having to jump through all the hoops of the traditional mortgage process.
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