The Risks of No Income Verification Mortgage Loan

A no-income-verification loan can be beneficial to some individuals who do not receive regular paychecks of a set or fairly predictable amount. The self-employed are typically the individuals who use this type of loan. Here are some of the risks that you will want to consider with a no-income-verification loan.

Risk for the Lender

First of all, the lender is taking a big risk with this type of loan. Many banks are reluctant to give these loans because of the risk associated with them. They have to take you at your word when you tell them how much money you make. This represents a much bigger risk than when they offer a loan that does have income verification. This type of loan has always had a much larger percentage of defaults than other similar loans.

Buy Too Much House

The biggest personal risk with a no-income-verification mortgage loan is that you will end up buying too much house. With this type of loan, it is up to you to be honest about how much you earn, and if your credit score is acceptable, your loan will probably be approved. The lender will use your stated income to figure how much of a loan it can give you. If you embellish your income to the lender, there is nothing stopping you from getting qualified for a bigger loan. While this might seem desirable at first, it is not always in your best interest in the long term. When you get a bigger house and mortgage payment, over time, it can become tough to stay on top of things. You might not be able to make your mortgage payments and eventually end up defaulting on the loan.

Another risk that stems directly from taking out a loan for a bigger house than you can afford is that your credit could be permanently damaged. When you embellish your income and get a bigger house, you are therefore increasing the risk that you will default on the loan. If that happens, it will be devastating to you and your credit. A foreclosure will stay on your credit file for 7 years. Therefore, purchasing another house during that time period will be very difficult. You will most likely have to live on a cash basis during that period of 7 years. Even after the 7 years is up, it will be difficult to rebuild your credit to its previous level. 

Higher Interest Rates

When the bank gives you a stated-income loan, you are going to have to pay a higher rate of interest because this type of loan represents a bigger risk to the lender than a traditional mortgage. When a bank takes on an investment, it goes by the rule that higher risk should bring a higher reward. This will increase each mortgage payment and the total amount that you pay for the loan.