Definition: A type of loan whose application requires the borrower to state how much she earns. The bank, however, never checks to see if this amount is accurate. For the borrower, the trade-off for not having to provide real proof of what she earns is that the interest rate she is charged by the bank will be higher than that of a normal loan.Example: With interest rates for normal mortgages being about 6%, an application for a no income verification loan is quoted a rate of 7%. She wants to borrow $250,000 to buy a home. She earns $90,000 per year, which she states on her application. This is more than enough to qualify for the loan, so based on her income as she has reported it, she is approved.
Investeach explains: Unlike a no documentation (“no doc”) loan which asks borrowers to provide very little information about themselves, this type of loan at least asks the borrower what her income is. Because mortgage brokers know how much money a potential borrower needs to earn to qualify her to borrow the amount she wants, the broker can more or less tell the applicant the minimum income she’s going to have to write on the application in order to be approved. If that number is more than the applicant actually earns, oh well. She’ll just have lie a little. In fact, this happened so often that in the industry this type of loan became known as a “liar’s loan”. These types of loans going bad in large quantities contributed to the financial crisis which began in late 2007.
Riddle me this:
1. What is the difference between this type of loan and a no doc loan?
2. What is the downside of taking out this type of loan?
3. What could a borrower do without consequence if she happened to earn less than the minimum amount required to be approved for the amount she wanted to borrow?
4. What nick-name did this type of loan have within the mortgage industry?
Related terms: Mortgage broker, No documentation loan.