Stated-income, or no-documentation loans are another example of a bad loan made to people with marginal credit scores. These loans allow borrowers to bypass the process of proving their income - that they can really afford the loan! These loans were originally intended for self-employed people who have substantial income and/or assets that they do not wish to list as part of a loan application. Now, the loan has evolved to include borrowers who cannot or will not show their proof of income.
The question is why people who can document their salaries would not want to do so. The answer is really very simple: They are buying houses they cannot afford. The result is that they leave themselves highly vulnerable to defaulting on their mortgage payment and eventual foreclosure.