A stated income loan is exactly what it sounds like: A borrower states their income to the lender, and the lender usually does not verify that information. It is usually used for people who are self-employed or have significant ups and downs in their income, for example, landscapers who work only when the ground is not frozen. I think that most people go into this type of loan properly. The tell the lender how much money they make. End of story.
But I have been shocked by the number of people who think "stated income" means, "I can make up any amount I want." Sometimes it is the borrower, and sometimes it is the lender/broker who is the instigator. The bottom line is, if the income you state to your lender does not match the amount you actually make, you are committing fraud. And if that amount does not match what you told the IRS you made, you are not only committing tax fraud, but you are a true pillock.
Take this purely fictional scenario:
"I only made $30,000 'on paper' last year."
"What does that mean, 'on paper'?" I ask, innocently.
"Well that's what we put on our tax return, but really we made about $50,000 with our side businesses, and we just put down $70,000 for our stated income 'cause we'll probably get that once my [insert get rich quick scheme de jour here] comes through for me," they gormlessly respond.
So, now we have mortgage fraud and tax fraud, but here's the really, really stupid part. Because they utilized a B-C stated income program, their interest rate on their principal residence is............14%! So, they committed tax fraud and saved probably nothing on their taxes, and committed mortgage fraud so they could get a bigger loan than they can afford. If they had just gone "legit" their interest rate would probably be less than half of what it is. But they sure beat the system, eh?