A Liar Loan is a loan that is called a stated income loan. As the name implies, you are stating your income. So, if you state your income to be higher than it is so that you qualify for the loan, then you lied, and that is why it is called a liar loan.
Stated Income loans are designed for self employed borrowers who can’t show their full income with documentation because they usally have tax write offs that make it look like they did not earn as much. So they go stated where they can state their honest gross income. They usually have a slightly higher interest rate to get this privilege.
Bottom line, if you or a lender state your income to be anything other than what it is, it’s fraud and if you default on your loan, both you and your lender can be investigated for fraud.
The term “liar loan” is another way of saying stated income or a no income verification loan. This is basically a program for people who are unable to prove their income. This was originally set up for self employed people who take a loss on their tax returns.
Stated income or no income verification is basically applying for a loan without having to provide proof of W2’s, tax returns or pay stubs. The interest rates are usually higher. By not making the borrower prove the income default rates are much higher and they tend to be foreclosed on more often. I hope this answers your question.