Combining stated income with a nontraditional mortgage product is an example of?

Combining stated income with a nontraditional mortgage product is an example of risk layering. This concept refers to the practice of combining various elements of risk that could affect a borrower's ability to repay a mortgage. In the context of this combination, using stated income—which may not fully reflect a borrower’s financial ability—with a nontraditional mortgage, such as an adjustable-rate mortgage or interest-only loan, creates a scenario where the lender faces heightened risk.

This blending of risky elements—like relying on stated income instead of verified income, as well as utilizing more complex mortgage structures—can lead to potential repayment challenges for the borrower. As such, lenders must be especially vigilant when approving these types of loans, as the combination increases the overall level of risk involved in the mortgage transaction.

This understanding helps underscore the need for robust underwriting standards and caution in managing credit risk, as different types of risk can compound when they are layered together.