A reader sent me an email pointing out that while everyone deserves a home too often it's the pushy loan officer or real estate agent who put people in over their heads and care nothing of the client other than a way to get a commission check.

I certainly can't argue with that. There are bad people in the world. All too often someone gets themselves into something either they don't feel comfortable about or are too shy at asking questions when they're not clear on some part of the transaction.

The consumer also can be to blame if they suddenly consider themselves "experts" due to all the stuff they read on the Internet. Buyers can hurt themselves on their own or at the advice of others.

But sometimes bad things happen because it's nothing more than loan fraud.

If someone has decent enough credit, and I don't mean "pristine," I mean average, anyone can get a home loan. And if the income is simply not there to qualify the borrower then the borrower is faced with either borrowing less money in the form of a larger down payment or a lower sales price or finding more income.

Or lying.

The problem with simply "lying" about income is often the person coaching the borrower is the loan officer himself. A "stated" income loan means that whatever the borrower puts on the loan application the lender will use to determine debt ratios. If a loan program requires a 45 debt ratio then the wheels start turning.

Do I put more down? Do I buy a smaller home? Do I get an adjustable rate mortgage? What about a hybrid? Payment Option ARM? How can I get my ratios lower than 45 so I can buy the house I want to buy?

Or should I just inflate the income? The trick with this practice is that the borrower typically doesn't know what ratio is needed on a loan program or how much income is needed to qualify for the loan. The loan officer does.

So instead of the borrower putting down simply "just some more income" they're often told, "You know, if you made $10,000 per month instead of $8,000 per month then you would qualify for this house."

"And if you take a stated income loan and put down $10,000 then the lender won't check out that income because the loan program doesn't require it. Whatever you put down, the lender uses," says the loan officer.

So that's what the borrower does, at the loan officer's direction. Put down $10,000. So what if the ratios are artificially high? The borrower thinks they can handle the higher payments and the lender's not going to check anyway, right?

Not unless the loan goes into default or some other item pops up in the file that could cause the lender concern later down the road such as an IRS form 4506 shows up with less income then people start going to jail.

Or the borrower takes another route. Instead of a stated loan he puts absolutely nothing in the income section. This loan type, called a "No Income Verifier" or NIV asks the borrower leave the income section blank.

There's nothing fraudulent about leaving the income blank because the borrower isn't inflating anything, he's simply not providing income information as per the lending guidelines. If other parts of the applicant's file meet the loan qualifications, then "Hello, new Homeowner!"

If however the borrower goes for an NIV because his standard ratios won't let him be approved then there's a possible train wreck ahead. Just because there's no income on the loan application doesn't mean there isn't any income needed to pay the loan back. There certainly is.

But sometimes in the heat of home buying a loan officer, knowing the borrows can't qualify using their regular income will suggest an NIV so the buyers can get approved. This is dangerous. Not necessarily for the loan officer but for the buyers. An NIV is designed for those with either hard to prove income or those with complicated tax returns.

It shouldn't be used to get someone into a home they can't afford.

Published: June 2, 2006

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, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.