The difference between a stated income and a full documentation, or "full doc", mortgage is simply how your gross monthly income is determined and/or verified in the mortgage application process.
In a stated income loan, your monthly income is just that... what you state it is. A stated income loan is available to both self-employed and wage earner borrowers. However, the income which you claim to earn must be reasonable for the type of business you own, or the classification or position you sustain as a wage-earning employee. For example, if you work as a substitute elementary school teacher, a mortgage lender, through its underwriting resources, would have some knowledge as to what a borrower in that position might earn in a specific state, county or location. Therefore, if you overstate what's acceptable or reasonable to a lender for your position, you're likely to be turned down for your loan. So, since the stated income approach asks that a lender basically "take your word for it", in terms of the amount of your income, there's a certain amount of risk to the mortgage lender in making this type of loan. Consequently, a stated income borrower will almost always pay a higher interest rate than a borrower whose income can be fully documented by pay check stubs, W-2's, and perhaps additionally... bank statements and income tax returns.
In some cases, it may be necessary for either a self-employed or wage earner borrower to take the stated income approach; especially if the only income they can document or verify would prevent them for qualifying for a mortgage loan, because their debt-to-income ratio exceeds the mortgage lender's allowable maximum percentage. If this is the case, a stated income loan may be your only option. But, for a less expensive loan, and for one that's easier to qualify for, the full doc approach to obtaining a mortgage is a better one.