For many years the lending process has become less and less rigid. In the general case this is a trend to be welcomed, but the question to be asked is this: Have we gone too far?

With "stated income" loans borrowers tell the lender how much they make but the lender graciously does not verify the information. The borrower's word is accepted as gospel, even if that word is sometimes inflated.

By comparison, if you apply for a mortgage and own rental property lenders are somehow less trusting. They want signed leases as well as tax returns that show income, costs and profits. They'll knock off 25 percent of your rental income as a "vacancy factor," thus reducing your ability to qualify for a loan -- even when tax returns show no vacancies for years.

But if you apply with a no-tell loan and provide no evidence supporting what you claim to make, lenders will gleefully accept your declaration without question. Only if the loan is later audited or you switch to a loan program that requires verification will anyone check your tax returns to see if what you told Uncle Sam and what you told the mortgage company are in anyway similar. The catch, of course, is that if the numbers differ a borrower can face serious legal difficulties, a situation to avoid and a chance no one should take.

Lenders will tell you that rental property represents more risk than owner-occupied housing, thus the justification for higher rates and tougher qualification standards. There is a certain logic to this view -- until you get to stated-income loans.

Why is rental property more risky than someone buying or refinancing a personal residence without income verification? The investor must supply reams of leases and tax returns because of lender worries that rental income might somehow be inflated. The prospective homeowner has no such requirement with a stated-income loan.

At this point someone will say, "look, we now have credit scores which allow us to show whether a borrower is creditworthy. To some extent, the question is not whether someone earns a given income, it's whether they can support a given level of debt."

Not always. Look for stated-income loans and you will find that such financing is often available to those with credit problems. Not to be cynical, but aren't these the very borrowers lenders would want to check with the greatest possible care? Do folks in such financial straights generally have great credit scores?

Another argument goes like this: "I'm a person who values privacy. I don't want lenders contacting my employer and I don't want people fishing through my tax returns. For these reasons I prefer a stated-income loan." If real estate financing is required why shouldn't lenders reduce risk and get verified information? What is the case for less prudence? If you were lending someone money wouldn't you want past tax returns, pay stubs and other data?

A third argument goes like this: "But we only make stated income loans in those cases where the borrower has 30 percent equity."

This is plainly true with some loan programs -- but not all. Search around and you can easily find 90 percent (or better) financing and refinancing with stated-income loans.

Some borrowers have a different issue: They're concerned that their income is "too difficult" for lenders to comprehend, that they're the only people since colonial times who have filed a 280-page tax return.

It just isn't so. Lenders deal with millions of loan applications each year. They've seen the returns of the rich and famous. They know how to evaluate sole proprietorships, corporations, foreign income, royalties, rents, and partnerships. If income is reported to the IRS, lenders can figure out how it fits within a loan application. If income isn't reported to the IRS, the lender should decline the loan.

Stated-income loans represent too much risk for lenders -- and too much temptation for borrowers. Perhaps a little rigidity in the lending process is not so bad. After all, how hard is it to produce tax returns and pay stubs?

For more articles by Peter G. Miller, please press here.

Published: July 27, 2004

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .