Mortgage involves a lot of paperwork. If your dog lender or mortgage broker you for documenting it a good sign – they are trying to get the best mortgage you can qualify for.
However, some people cannot produce the required documents. For them, a low-documentation (or no-documentation) loan is appealing, and some of these loans are still available.
Reasons for the low documentation loan
There are several reasons why you may not be able (or willing) to provide information to a lender. For example:
- Self employed people prefer to show lower income for tax purposes, but this backfires when applying for loans
- Young workers have a history of low wages or no history at all
- New entrepreneurs cannot show a past consistent return (multi-year worth is usually required)
- Pensioners with investment income
- Data protection needs dictate that you keep your income
- Finding and organizing documents is too difficult
- Your income or assets are in no way documented acceptable to the lender
The qualification Without documentation
The “good old days” of simple qualification are over. Before the financial crisis, which peaked in 2008, you can simply tell your mortgage broker how much you earn and little or no evidence was required. Those “declared incomes” (also known as “liars loans”) are no longer freely available.
The Consumer Financial Protection Bureau (CFPB) now requires lenders to ensure that you have the ability to get everyone approved for loan repayment – if the mortgage is a “qualified” loan. But some lenders are willing to work in the non-qualified mortgage room.
Note that these lenders are not looking to go back to 2006 – they are not interested in issuing subprime loans with inaccurate numbers. however, they are interested in working with people who have the ability to refund (while lacking the ability to document their income and wealth in traditional formats).
In order to qualify for these loans, you need to be an attractive borrower and the properties below will help you.
Good (or good) credit: again, low-documentation subprime loans are a thing of the past. Lenders are only willing to settle for less information if you have large credit scores (over 720 is a good place to start). That said, if everything else is in good shape, a few dents on your credit reports may not ruin your business.
Income: Income always helps you get approved for a loan. But non-qualified lenders could be more forgiving about evaluating your income. If you can make your case (even if you can’t produce a W2) you could get approved.
Active people: Having lots of backup money helps too. Large banks and investment accounts could serve the “reserves” that you can dip into to keep payments. Lenders can mitigate income if you are strong on assets.
Equity: Lenders like minimizing their risks and seeing that you have skin in the game. If you make a larger down payment, you have better chances of getting lenders with lower documentation. For conventional mortgages, 20% is sufficient, but 40% or more might be required with unqualified lenders. You can always put that stock to use a day later.
There is no such thing as a free lunch. Since you are not proving your ability to use standard repayment documents, lenders take more risk. These lenders also take a regulatory risk by working in gray (but still legal) areas. As a result, the price is higher.
Expect an interest rate that is at least one percent higher for a low documentation loan. Other processing costs can also be inflated. If you are just applying for an easier way of finding a loan, this might not be your best option (raving the old tax returns and paystubs). But if you fall into the categories above, it might be your only option and still worth the price.