First, a little History 

When I first ventured into the mortgage business, one of the first things that I found to be truly amazing was the stated loan. How could a bank expect and trust people when asking what their income was? Wouldn't people simply overstate their income in an effort to meet the DTI ratio of the banks? Why wouldn't the bank want income verification, since they are lending the borrower hundreds of thousands of dollars, after all?

The truth as to why banks allow stated loans are different from my initial perception. Banks trust numbers, not people. If you have a high FICO score, you earn more trust. Likewise, if you have more money down, then you earn more trust, and so on. The stated loan gained traction during the run up in real estate prices. When prices are going up, banks scrutinize borrowers far less, because in the event that they default, the collateral (the house) is most likely worth more than the bank initially lent. When you combine escalating prices with high FICO borrowers who are willing to put 20% down, it's basically a can't lose proposition for the bank. Reason being, with prices escalating, borrowers are far less likely to default, as they will beg the borrower and steal to hold onto their equity. In the event that they do default on the property, it is quite likely worth more than the bank originally lent to the homeowner. Combine those two factors with a borrower willing to put 20% down and it's a no brainier for the bank.

The less hassle and paperwork that accompany the loan, the more borrowers they will attract. The more borrowers that they attract, the more loans they will write, thus the more money they make. If the task of providing income documentation proves to be too much of a hassle, just "state" what you make and we'll get the loan approved.

What can you "State"? 

Ethically you should state what you make. However this is rarely the case, as stated loans typically cost a premium for the higher risk, and why you should pay a premium to avoid copying a few W-2's. Banks all use their own methods of making sure your income is in line with your profession. Usually, they'll check salary.com and run your occupation in your geography.  This will spit back a range of values, and what you state has to fall within that range.  So, for example, if you are a janitor, you can't state you make $200k. Certain professions, like sales, for example, provide far more leeway.

Where Did it all go Wrong? 

CountryWide was a pioneer in the stated loan business. They had what was called the "fast and easy" loan.  If you had a FICO above 720 with 20% down and could state your income, then you were pretty much an ideal candidate for the rate. Most of the original stated loans from countrywide probably never defaulted, but the greed of mortgage banks and the shrewdness of loan officers eventually led to what came next. Gradually, banks became more and more lenient with what they'd allow.  Thinking that the property was appreciating and that they could recoup what they had lent in foreclosure, banks tossed out the old rules and invented new ones. So from your original "fast and easy" with your 720 borrower with 20% down, this ultimately turned into 620 borrowers with 0% down on investment properties. That's right, you could put nothing down on a third home and not even have good credit and you could get away with stating your income. Anyways, we all know how things turned out. 

Are there still stated Loans? 

Yes there are still stated loans, although banks and state regulations have made them very scarce.  Currently, to get a stated loan, expect to put down at least 25% and have a FICO in the 700's. Looks like things came full circle.