As a mortgage broker for close to 4 decades, I’ve seen loan programs (and lenders) come and go. Some of the population fit into the traditional “Box” as a W-2 employee where income to qualify for a loan is obvious and easily documented. Many potential borrowers fall into the business owner, independent contractor, investor or gig worker categories where income may be good, but not stated in the obvious manner. For those mortgage borrowers that don’t fall into the “Box”, a No-Doc or Alternate Doc loan may be the answer.
Before the Great Recession around 2007 No-Doc mortgages operated on an honor system where borrowers stated their income without providing concrete proof. Lenders reviewed credit histories but took borrowers at their word regarding earnings. However, post-Great Recession regulations now require lenders to verify a borrower’s ability to repay (ATR) the loan. The tighter regulations are primarily applicable to “Owner Occupied”, not so much to business or investment based mortgages.
Two primary elements are in play. Meeting the criteria applicable to gov’t regulations, and showing the loan makes economic and credit risk sense to the investor/institution supplying the money and making the loan.
Logically the more paper (documentation) supplied to the lender, the credit risk appears lower, so the mortgage is more likely to be approved, with a lower interest rate.
Qualifying for a No-Doc Mortgage
Securing a no-doc mortgage today requires meeting stringent criteria:
*Ample income and significant assets
*A higher down payment
*A higher credit score
Lender’s underwriting will use a sliding scale giving better rates and terms to a higher credit score (ex. 780 over 700), high reserves, more money or equity applied to the transaction (ex. 50% loan to value is better than 75%)… or more documentation proving higher income will be required.
Types of No-Doc/Low-Doc Loans
No-doc mortgages come in various forms, each with specific requirements:
- No-Income, Verified-Assets (NIVA) Loans: Lenders verify the borrower’s ability to repay through liquid assets.
- Bank Statement Loans: Borrowers use past bank statements instead of pay stubs to prove income. This can range from 1 month to 24 months of statements.
- No Income, No Assets (NINA) Loans: These loans rely on rental property income to verify repayment ability.
- Equity Based, Equity Share Loans: No monthly mortgage payments, but share a proportionate amount of the increase in equity as the interest payment when property is sold or refinanced.
No-Doc Mortgages vs. Conventional Mortgages
While no-doc and conventional mortgages both facilitate property acquisition, they differ in terms of approval requirements and loan terms. No-doc loans demand higher credit scores and larger down payments, and they often come with higher interest rates due to the perceived risk.
Pros and Cons of No-Doc Mortgages
Pros:
- Beneficial for borrowers without a steady paycheck.
- Faster approval process due to less required paperwork.
- Takes Tax Returns and paystubs out of the equation
Cons:
- Limited availability in 2024.
- Higher credit score and asset requirements.
- Generally higher interest rates than conventional loans.
Should You Get a No-Doc Mortgage?
Consider a low/no-doc mortgage only if you cannot qualify for a traditional loan. Optimally a borrower should work with a mortgage broker that has many lender sources and understands their program guidelines. Maybe the borrower will qualify for a traditional mortgage, if the borrower’s capabilities are fully evaluated, and the loan package is processed correctly? Too many borrowers are denied loans because they expect going to a bank with limited programs or uploading documents to an online lender will get them what they need…
Solid Preliminary Loan Approval Is Critical When Negotiating With A Seller
I always say start the loan process and pre-approval process long before you need it. Rushing to get a loan in place last minute limits a borrower’s potential financing options.
Make sure the mortgage Pre-Approval is worth the paper it’s written on and the transaction terms negotiated are solid to close. An astute/knowledgeable real estate agent working for the seller should be verifying a buyer’s capability to close a transaction before having a purchase offer signed off by the seller. Things can always pop up during an escrow period, but too many transactions were doomed from the start, and shouldn’t have even been initiated. Nobody wants to be broadsided in the middle of a transaction, or right before the close of escrow because of something fundamental that should have been known about early on.
Business Loans/Fix and Flip/Rehab/Investment Loans
There are more loan products available for borrowers if it’s not exclusively for an Owner Occupied property. Even an owner occupied property that has business or mixed use capabilities may be perfect for the low/no doc type of loan. The exact type of property and application should be run by the underwriter to be sure it meets the lender’s criteria. Not all lenders or loan programs are created equal. These programs are constantly changing, and it takes a knowledgeable loan officer to know what questions to ask and navigate many nuances between the borrower, the transaction and the lender.
If you are in the Los Angeles area, and have any questions or real estate sales or financing needs, feel free to contact me
Ron Henderson GRI, SRES, SFR, RECS, CIAS, CREN, GREEN
President/Broker
Multi Real Estate Services, Inc.
Gov’t Affairs Chair – California Association of Mortgage Professionals (2017-2018)
Chairman – OutWest Marketing Meeting (Real Estate Education)
BRE #00905793 NMLS #310358
www.mres.com
ronh@mres.com
Specialist in the Art of Real Estate Sales and Finance
Real Estate market, mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley, Woodland Hills, West Hills, Calabasas, Chatsworth
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