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No Stated Salary? No Problem...No Doc Mortgages Available
If your income doesn't come from a paycheck or you don't want to reveal all your financial information to a lender you can still get a home loan. Here's how, with the help of a "no doc" mortgage.
Most homebuyers work for a steady paycheck and are willing to divulge details of their finances in exchange for the best available mortgage loan.
But there are also many buyers who cannot substantiate their income with traditional documentation such as a steady paystub or W2 forms. They own businesses, make commissions, live off investments, get their income in cash. Others simply don't want to give up their financial privacy. No-documentation mortgages are available for these people.
They're called "low-doc" and "no-doc" mortgages for the amount of documentation they require. The terminology isn't always accurate. Some low-doc mortgages require the borrower to give up lots of paperwork, such as tax returns and profit-and-loss statements. Even no-doc mortgages require at least a credit report and a property appraisal.
No-doc mortgages carry higher interest rates than conventional mortgages. Lenders want these borrowers to make substantial down payments and to have excellent credit.
Ethical mortgage brokers and lenders generally try to talk customers out of getting low-doc and no-doc loans because they cost more. Before applying for one, talk to a qualified mortgage banker first. Many people who ask for a "no doc" loan don't need it. A good loan officer can help you work through and document what you think is undocumentable.
There are three main types of low-doc/no-doc mortgages.
1. Stated-income mortgages tend to be for people who work but don't draw regular wages or salary from an employer. That includes self-employed people or those who make a living off commissions or tips.
2. No-ratio loans are often the right call for wealthy people with complex financial lives, retirees who live off investments and people whose lives are in flux because of divorce, recent death of a spouse, or career change.
3. No-doc or NINA (no income/no asset verification) mortgages are for creditworthy people who want maximum privacy and can afford to pay for it.
Stated-income mortgages
Someone who gets a stated-income mortgage must disclose annual earnings, usually for the last two years and sometimes more. Instead of backing up the income statement with pay stubs and W2 forms, the borrower might have to show tax returns, bank statements and even profit-and-loss statements.
The borrower must list assets and debts. That's why the term "low documentation" isn't always accurate.
Stated-income mortgages are for people who make the money they say they make, but that amount doesn't show up on the bottom line of their income taxes. They work for cash. They might be cleaning people or people who work in restaurants It is also good for self-employed borrowers - such as commission salespeople - who actually make gross sufficient amounts of income, but write off a lot on their taxes. They have the capacity to pay the loan back, but what they file with the IRS doesn't reflect their real income.
The borrower has to list debts because the lender wants to determine the debt-to-income ratio. That's the percentage of gross income that is used to pay off debt. Lenders look at two ratios: the percentage of income that goes toward the mortgage payment, and the percentage that goes for all debt, including mortgage, credit cards, auto loans and other loans.
A rule of thumb states that the interest rate on a stated-income mortgage is about a half-point above the comparable rate for a conventional mortgage. Like all rules of thumb, that's sometimes accurate and often isn't.
A borrower's interest rate depends on a lot of things: income stability, debt-to-income ratio, credit score, size of the down payment and appraised value of the property. Depending on those variables, a borrower with a stated-income mortgage could expect to pay anywhere from one-eighth of a percentage point above the conventional rate to more than 1 percentage point above.
No-ratio mortgages
With these mortgages, the borrower doesn't declare income. No pay stubs, no W2s, no tax returns. Think of it as the "don't ask, don't tell" mortgage: The lender doesn't ask how much the borrower earns, and the borrower doesn't tell.
These are called no-ratio mortgages because the lender doesn't compute the debt-to-income ratio. The lender can't compute it because the lender doesn't know the borrower's income. Sometimes the borrower doesn't supply a list of debts, either.
But the borrower does list assets -- money in the bank, stocks and bonds, real estate, ownership stakes in businesses. The purpose of the no-ratio program is to provide expedited processing for creditworthy borrowers. It's not intended as a means to qualify marginal borrowers.
Someone who owns 10 car dealerships might apply for a no-ratio mortgage because a conventional loan could require submitting personal and corporate tax returns and a year-to-date profit-and-loss statement for all the dealerships. It might cost him more to assemble that from his accountant than it would cost in rate.
This type of "no doc" loan also can be for someone going through a big change, such as a divorce, death of a spouse, a career switch or retirement.
There are those who basically retirecashed out of their business, got $3 million and invested it will make 10% interest every year. That can't be documented, so that's a person who might get a no-doc loan until they get a track record of making money.
The rate for a no-ratio mortgage would start out at about a half-point above the rate for a conventional mortgage and might be up to 3 points higher, depending mostly on credit score, size of down payment and the property appraisal.
No-income/no-asset verification mortgages
These loans, sometimes known as NINAs, need the least documentation. In some cases the borrower provides his or her name, Social Security number, the amount of the down payment and the address of the property being bought. That's it. The lender gets a credit report and a property appraisal.
The line gets fuzzy between no-ratio and NINA mortgages. A lot depends upon the borrower's credit score. The better the score, the less documentation the lender will demand. In many cases, the lender will want to know what the buyer does for a living, and for how long. Lenders feel more comfortable with a borrower who has been doing the same job for at least two years.
In any case, an excellent credit score is required. These no doc mortgages are for people who never, ever fail to pay bills on time. Actually, they're for people who employ assistants to pay the bills on time.
They're meant for people who zealously guard their privacy -- the movie star who doesn't want someone in the loan office selling copies of her tax return to The National Enquirer, for example.
The less documentation, the higher the rate. Someone getting a no-doc mortgage might pay up to 3 percentage points higher than the going rate for fully documented conventional mortgages.
It's always a layered risk situation. The size of the down payment is one layer -- the bigger the down payment, the lower the risk and the lower the rate. The same goes for credit score, willingness to show ownership of assets, and the degree of openness about what the borrower does for a living.
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