Liar loans are a type of mortgage arrangement that is structured with a low-documentation or no-documentation format. Because the amount of detail included in the mortgage arrangement is limited and may go unverified, there is a greater degree of possibility for unethical borrowers and lenders to misrepresent the current situation of the borrower or the terms associated with the mortgage. In spite of the degree of risk associated with a liar loan format, mortgages of this type are commonly utilized.
Both low-documentation and no-documentation loans tend to focus more on two important aspects of the borrower’s qualifications. First, the current credit score of the borrower is ascertained. If the credit score is within an acceptable range, the next consideration is the requested amount of the mortgage. If the loan to value ratio of the mortgage appears to be within reason in light of the reported gross income of the borrower and the current credit score, there is a good chance the mortgage will be approved without any further investigation.
What this means is that the liar loan process leaves the door open for the borrower to claim more income than is currently being generated. If the credit history tends to demonstrate that the borrower is responsible with money and the amount of the mortgage is within reason, there is not always much effort to verify the income sources. As a result, the borrower can embellish the amount of income reported in the application in order to qualify for the mortgage loan.
At the same time, a mortgage broker may use this same loophole to force through a loan application that is marginal. The rationale is that even though the mortgage may be difficult for the borrower, he or she is obviously responsible with money and will find a way to make the payments. When approached from this perspective, the mortgage broker can even justify the small white lie by thinking the action is helping the borrower.
There are a couple of common loan formats that are classified as a liar loan. The Stated Income/Stated Asset or SISA loan requires nothing more than declaring assets and income on the application. With a No Income/No Asset or NINA loan, the applicant does not have to supply information about any income or assets currently held. With a NINA loan, the current credit score becomes an important component.
While the risk of abuse of a liar loan is greater than other types of mortgages, the fact is many people are able to utilize these loan types and do not abuse the process. Often, a liar loan does carry a higher interest rate owing to the greater degree of risk assumed by the lender. As with any type of mortgage agreement, both the lender and the borrower should be clear on all provisions in the agreement before making a commitment.