Liar Loan is a loan type, reasonably named after its misleading setting, is a mortgage type where borrowers can provide their income details during their loan application process without providing any information for confirmation. Liar loans are also known as NINJA loans (No Income, No Job, No Assets).
Or stated-income loans, and they were in the spotlight during the financial crisis in 2008 for their role in the collapse of the housing market. Regardless of their aim to make the lending process easy, liar loans have contributed to general foreclosures and defaults, as well as careless lending standards. In this blog post, we will learn about how it works and the risks of taking out one.
What is a Liar Loan?
A liar loan is also known as a NINJA loan or stated-income loan, and it is a form of mortgage where applicants are allowed to provide their income during the loan application process without having to verify their income or provide supporting documents. By doing this, borrowers make it an opportunity to falsify their financial situation and increase their income.
How Does it Work?
During the application process for a liar loan, the borrower will only mention their income status on the application form without submitting any proof like tax returns or pay stubs. Then, the lender will carry little to no verification of the borrower’s income information. This smooth application can make applying and getting approved easy. However, this opens opportunities for misrepresentation and potential fraud.
What is a Liar Loan Used for?
Originally, liar loans were meant to assist individuals with unstable income streams or self-employed borrowers who could not meet the income documentation requirements of traditional lenders. On the other hand, they can be used for multiple purposes, which include:
- Debt consolidation.
- Purchasing residential properties.
- Financing second homes or vacation properties.
- Investment in real estate.
- Refinancing existing mortgages.
- Securing a mortgage quickly without extensive paperwork.
- Funding home renovations or improvements.
- Tentative real estate investments.
- Buying rental properties.
- Flipping houses for profit.
Pros and cons
Here are the benefits and drawbacks of applying for a liar loan:
Pros
- Fast approval.
- Extensive documentation is not necessary.
- Potential for higher loan amounts.
- Easy application process.
- Accessible for borrowers with limited credit histories.
- Income reporting flexibility.
- Available for self-employed individuals or people with unstable income.
- Opportunity to leverage assets for property investments.
- Potential for borrowers to qualify for other loan types.
- Financing real estate investment possibilities.
Cons
- High risk of default.
- Financial overextension.
- Exposure to fraudulent activity by borrowers.
- Increased risk for lenders.
- Contributed to housing market fluctuations and economic drops.
- Damage to the financial stability and credit score of borrowers.
- Higher interest rates and fees.
- Regulatory inspection and possible legal consequences for both borrowers and lenders.
- Limited form individuals with poor credit history.
- Has a hand in the subprime mortgage crisis of 2008.
Liar Loan Requirements
The requirements for applying for a liar loan differ depending on the type of loan and the lender. Here are the common criteria that you need to meet:
- Minimum credit score.
- Proof of assets.
- Minimum down payment.
- Satisfactory debt-to-income ratio.
- Employment history documentation.
- Cooperation with state and federal lending regulations.
- Proof of income.
- Property inspection and appraisal.
- Disclosure of any financial obligations or existing debts.
Where to Find a Liar Loan
Here are some of the best sources to find stated-income loans or liar loans:
- Online mortgage lenders.
- Traditional banks.
- Specialized lenders.
- Credit unions.
- Online mortgage lenders.
Be sure to check out while shopping for a NINJA loan.
How To Apply for a Liar Loan
Applying for a stated-income loan or NINJA loan unlike a traditional mortgage is quite easy. However, it is important to note that it is risky to obtain for both the borrower and the lender because income verification is not performed. Nevertheless, here is a general guide you can follow to get this type of loan:
- Find lenders that provide liar loans.
- Confirm eligibility.
- Prepare the necessary documentation.
- Fill out the application form provided by the lender.
- Enter your personal information.
- Employment details.
- Financial details.
- Details of the property you plan to refinance or buy.
- State your income.
- Wait for the lender to go through your financial information.
- If you get approved, you get a loan offer.
- Go through the terms and conditions of the loan.
- Assess the repayment terms.
- Interest rates.
- Any associated fees.
- Loan amount.
- Agree or accept.
Then, you can continue with the closing procedure, where you will need to finalize the loan by signing the necessary documents. After you are done with closing, you can start making your monthly payments to pay back the loan.
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 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 state-funded 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.
In Conclusion
It is important to understand the risk involved with taking out a liar loan, especially when assessing the risk of default, possible high interest rates, and associated fees. Additionally, make sure you explore alternative financial options and review your current financial situation to find the best option for your needs.