No Doc Mortgage: what you need to know
Applying for a mortgage involves a small mountain of paperwork, including bank and tax statements, pay stubs and more. These documents help answer many questions a mortgage lender will ask in order to qualify for a loan.
If your income is irregular, however, or if you don’t have some of the standard evidence of a typical full-time employee, you may not be able to answer all of these questions. In this case, you could be a candidate for a mortgage without documents or without income.
What is a mortgage with no income verification?
A mortgage without a doc is often referred to as a mortgage with no income. As the name suggests, this type of loan does not require a lender to verify how much you earn. These are also sometimes referred to as NINJA mortgages, which means no income, no jobs, or no assets.
“It’s an option that’s been around for decades,” says Greg McBride, CFA, chief financial analyst at Bankrate. “During the housing boom, however, this once niche product came into contact with traditional borrowers. It was fertile ground for the problems that led to the housing collapse. ”
In the years leading up to the financial crisis, no doc mortgages tended to be offered by subprime lenders, not major financial institutions, McBride says. However, due to the complexity of the financial sector, even the largest banks have found themselves at risk of not verifying a borrower’s ability to repay a loan.
Since then, “no mortgage loan has become a niche product again,” says McBride. “They are probably even more specialized than before.”
How Do No-Doc Mortgages Work?
Historically, no doc mortgage operated on a somewhat honor system: the borrower declared his income without providing a load of paperwork to substantiate his claim. The lender still looked at his credit history, but took the borrower at his word about how much he was earning.
The government has since addressed this problem with what is called the repayment capacity rule. In short, under this rule, a lender must determine if you can actually pay off a mortgage.
“You usually can’t trust what consumers tell you orally about their income,” says the Consumer Financial Protection Bureau (CFPB) in its handbook for mortgage lenders. “You need to verify a consumer’s income using documents such as W-2s or pay stubs.”
However, the CFPB offers some flexibility in documenting how a borrower can repay. For example, a lender could use financial institution records that highlight the borrower’s assets to facilitate processing of a loan.
When would you need a mortgage without a doc?
A no-doc mortgage might be in the cards if you don’t get regular paychecks but have a lot of cash or assets. This product only applies to a few, however.
“This is not something available to your typical middle class or upper middle class borrower,” says McBride. “It’s an offer for a wealthy person with rather unique circumstances, like an entrepreneur who runs a successful start-up and has a lot of equity in the business.”
No doc mortgages compared to other loans
A mortgage without a doc has the same advantage as other types of home loans: it helps you borrow the money you need to buy a property.
However, the terms and conditions of credit needed to get approved for a no-doc mortgage are different. Simply put, no doc loan requires higher credit scores and larger down payments.
They also tend to charge higher interest rates. Why? Because not having full concrete proof of income carries a higher risk of default.
|Conventional loan||FHA loan||No doc loan|
|3% deposit||3.5% deposit||30% or more deposit|
|620 credits minimum||580 credits minimum||700+ credits minimum|
|3.120% * average interest rate||2.940% * average interest rate||Varies, but expect to pay several percentage points more than conventional loans|
Can you get a mortgage without a doc today?
While no-income verification cash loans do not exist in the same form as before the Great Recession, there are no-doc mortgages. non-qualifying mortgages. You will not find these products widely advertised. In fact, all of the major banks contacted for this article indicated that they do not offer this type of loan. You are more likely to find them through a portfolio lender, and in some cases, they may qualify as a bank statement loan.
If you are someone who is afraid to prove your income because of being self-employed or working to get tips, there are other ways to qualify for a conventional loan. It won’t be a no-doc situation, however; you will have to give several documents to get a mortgage if you are self-employed.
“In the absence of regular paychecks,” says McBride, “a proven income stream via tax returns is how many self-employed and business owners qualify for mortgages.
There’s just one catch: these tax returns must provide convincing evidence – a challenge if you’re focusing on maximizing deductions.
“The problem is, some business owners run these businesses at a loss,” McBride says. “If it’s a loss for tax purposes, it’s also a loss for loan eligibility purposes.”