What Is a Liar Loan?

A liar loan is a mortgage loan that requires little or no income documentation. Because the lender does not verify income and assets by looking at W-2 forms, income tax returns, and other records, such loans are called "liar loans" because lenders simply take the borrower at their word. Learn more about what a liar loan is and how it works.

How a Liar Loan Works

Income and assets are noted on the loan application for certain low-documentation loans, such as stated income/stated asset mortgages (SISAs). On the other hand, with 澳洲幸运5开奖号码历史查询:no income/no asset mortgages (NINA), the lender doesn't even require yꦏou to disclose income and assets at all.

Some liar loans take the form of 澳洲幸运5开奖号码历史查询:NINJA loans, an acronym that means the borrower has "no income, no job, and no assets." These loan programs open the door for unethical behavior by unscrupulous borrowers and lenders, and have been abused in the past. They have resulted in borrowers taking on loans that they could not afford, and facing foreclosure as a result.

Low-documentation and no-documentation loans were originally designed for borrowers who have trouble producing paperwork to v🦩erify their income and assets, such as prior tax returns. Otherwise, they might derive income from untraditional sources where such documentation is unavailable, such as tips or a personal business.

Low-🧸doc and no-doc loans were meant to give individuals and households with nontraditional income sources the opportunity to become homeowners. For exa♏mple, self-employed individuals tend not to receive monthly pay stubs and might not have a consistent salary.

Low-documentation mortgages usually fall into the Alt-A category of mortgage lending. Alt-A lending depends heavily on a borrower's 澳洲幸运5开奖号码历史查询:credit score and the mortgage's 澳洲幸运5开奖号码历史查询:loan-to-value ratio to determine the borrower's ability to repay.

How Borrowers and Brokers Use Liar Loans

Low-doc and no-doc loans are called liar loans because they open the door for abuse (or lies) when borrowers, their mortgage brokers, or loan officers overstate income or assets to qualify the borrower for a larger mortgage. Borrowers or brokers might do thiꦛs to secure mortgages that would otherwise not be authorized.

The proliferation of liar loans was a contributing factor in the 2007-2008 Financial Crisis and 澳洲幸运5开奖号码历史查询:housing bubble. Liar loans potentially accounted for $100 billion in losses, or 20% of total losses, registered during the crisis.

Borrowers received approvals on mortgages that exceeded their ability to repay. Some mortgage brokers pushed these loans, particularly before the overall real estate market saw a 🎃significant run-up in valuations. In effect, over-speculation led to unscrupulous behavior. Often, individuals who had no intention of repaying their mortgages were allowed to buy a residence.

After the financial crisis, regulatory reforms such as the Dodd-Frank Wall Street Reform 🐼and Consumer Protection Act put new constraints in place to deter and prevent such activity going forward. The reforms required lenders to make a reasonable and good-faith determination of a borrower's ability to repay any loan secured by a dwelling.

Frequently Asked Questions (FAQs)

The Bottom Line

A liar loan is a loan in which the lender does not require proof that the borrower has met financial requirements. Instead, the lender takes the borrower's word when they provide information. Liar loans were once common among mortgage providers, but now, mortgage lenders must require more stringent proof that the borrowers have met their criteria for credit score, income, and other factors.