If the thought of getting a mortgage frightens you because of the vast amount of paperwork that is required, you may want to look at no doc loans. While these loans have certainly taken a back seat to traditional loans in recent years, they are still available from a select few lenders.
The people that are good candidates for the no doc loans are those that are self-employed, retired, or newly employed with little history to verify. What’s the tradeoff for the ‘no doc’ loan? Typically, you’ll pay a higher interest rate and higher closing costs than a borrower that gets a traditional loan.
What do you Need for No Doc Loans?
The name no doc is a little misconceiving. Yes, you still need to provide some documentation to get the loan. The lender needs to make sure that you can afford the loan beyond a reasonable doubt. Typically, people with this type of loan don’t verify their income, but they are able to back it up in some other way, such as:
- A high credit score – If you can’t quite verify your income because you are self-employed or don’t have a long employment history, but you have a high credit score, your income may not matter. Lenders can tell a lot from your credit score. They can tell if you pay your bills on time, how much credit you have outstanding, and what your credit history is like going back several years. If you have great credit, you may be able to convince a lender that you are a good risk.
- A lot of assets – If you are able to verify your assets, we suggest that you do it. Not verifying your income is risky enough or lenders. If you can show them that you have a large amount of assets in your checking, savings, or investment accounts, they may be more willing to give you the loan. They will generally base your assets on the number of months of mortgage payments that they cover. The more months you can cover, the higher your likelihood of getting the loan becomes.
- A large down payment – Lenders want to know that you have your own investment in the home. If you don’t verify your income, at the very least, they want your own money invested in the home. This way they have more reassurance that you will do what it takes to get the mortgage paid no matter what happens. If you only put a little bit of money down, you have a higher likelihood of walking away from the home.
An Alternative to No Doc Loans
If you can’t find a lender or you don’t like the high rates and fees that come along with the no doc loan, you may have another option – the Bank Statement Loan. This is a good option for those borrowers that have good income, but can’t prove it via their tax returns or W-2s. The Bank Statement loan allows you to verify your income through the use of your bank statements over the last 24 months. The same rules apply as with the no doc loan, though. Because the lender isn’t officially verifying your income with your W-2s and/or tax returns, they will need to see some compensating factors. At the very least, they want a large down payment and money in savings to cover at least a few months of payments.
While no doc loans might not be the most common anymore, they are available from a variety of lenders. You may have to shop around a little bit to find a willing lender including using a broker or shopping for a lender online rather than just in your local area. It’s a good idea to get quotes from at least three lenders so that you can find the loan that costs the least amount for you.