Here’s a breakdown of reported income taxes, so-called “no income verification” or “documented” insurances. Looks great – until you see the price.
This is why it looks great.
You do not need to provide proof of employment or proof of income. Then again, you don’t want to go through 60 days of document filing hassles after the document opens your worm bin for your income details. You will not encounter any routine procedures related to filing tax returns and verifying income.
But then there is the price…
Standard income insurances first appeared in 2008. Its creator was the Ameriquest Corporation. It was introduced by banks as part of their regular repertoire and was cheaper than it is today. Then came the series of defaults, and the banks pulled out as fast as they could. Today only a few daring individuals sign insurances and finance them out of their own pockets. In order to ensure maximum profit and compensation for risk, these unconventional lenders set arbitrary rules, terms, repayment rates and schedules.
Here’s the good news about income insurances announced as they appeared in 2015:
If you are a borrower, here’s what the lender will require:
- No W-2 Income Documents
- No need to file tax returns
- There are no IRS documents
- No need to show proof of work
Instead, you will simply be asked to state how much you earn and they will take you at your word. No wonder these insurances are called “false insurances” or “false insurances”! Advertised income mortgage insurances are becoming increasingly popular for borrowers with low credit as well, especially in the case of people who have an unstable source of income or have reduced self-employed income shown on their taxes. Your application for a specific mortgage insurance is approved based on your cash reserves or equity and your ability to afford the monthly payments. Whether you can or not depends mainly on what you tell your lender.
The terms of these insurances make them attractive to clients with a wide range of credit records, including mortgage borrowers. The lack of verification makes these insurances simple targets for fraud.
Advertised income insurances are also attractive in that they fill a gap in situations where normal insurance criteria do not meet. For example, the standard rule is that a client’s mortgage and other insurance payments should not exceed 45% of a person’s income. This makes sense when it comes to someone applying for a mortgage for their first home. However, a real estate investor may own several properties and each may receive only a small amount more than their insurance payments per home, but end up with $200,000 in disposable income. However, an undisclosed income insurance would turn this person down because their debt to income ratio would not align. The same problem can arise with self-employed borrowers, where a bank with a fully documented insurance will include the borrower’s business debt in the debt-to-income account. Declared income insurances also assist borrowers in cases where fully documented insurances are not considered as reliable and stable source of income. Examples include investors who are constantly earning capital gains.
Finally, fully documented insurances do not take into account potential future income increases. (This is similar to a “non-disclosure of income” insurance).
So what’s the point?
Abundance. There is more interest in one. Lenders take a huge risk by extending this type of insurance to you, so they want to make sure it’s worth their time. They will ask you for very huge payments – think twice, if not three times, the rates of a conventional insurance. So keep in mind that you will be paying generous premiums every month.
Then there is a higher chance of default. Banks cover their risks by assessing your ability to repay. This way they reduce the chances of default. The non-traditional lenders who distribute these declared income, or “documentless” insurances, basically accept anyone on their word. Most of these applicants tend to exaggerate their income as a result of falling into unwelcome levels of bankruptcy.
In August 2006, Stephen Kristofiak, president of the Mortgage Brokerage Association for Responsible Lending, reported that his organization compared a sample of 100 advertised mortgage applications with IRS records, and found that nearly 60% of the borrowers sampled had overstated their income by more than of 50 percent.
The fraudulent misuse of these insurances grew to such an extent that in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act went into effect to restrict said income insurances. Article 1411 of the law states: “A creditor who makes a mortgage insurance must verify the amounts of income or assets on which this creditor depends to determine the ability to repay…”.
Today, lenders perform their own version of income and asset verification, but many borrowers can still slip past and collapse. Some of the results are court cases, stress and bankruptcy.
In short this…
Some small banks still offer advertised income insurances. Qualification requirements are based on stable employment, good reserves, good FICO and at least 40% equity in the property. Advertised income insurances are also offered by independent individuals who finance out of their own pockets and may be more lenient in their requirements. Availability of declared income insurance changes from state to state and province to province. This type of insurance is ideal for self-employed individuals, or for those borrowers who do not have a stable source of income, as well as for applicants with low credit scores, and applicants who do not want their income documents to be reviewed by undertakers.
The price is high, so if you find this intimidating, you may want to consider taking the opportunity to go the traditional route.
Do you think that advertised income insurances are the way for you?