The early 2000s proved to be the bane and boon for the mortgage industry. A large group of would-be homebuyers emerged with the housing boom. Unfortunately, the demand caused real estate prices to go up. Many buyers had limited financial means and tainted credit so the lenders got creative. Thus, the no documentation mortgage loans were born.
Commonly known as ‘No Doc’ loans, this financial product normally doesn’t have the usual verification requirements that most loans have. This means that a borrower need not present proof of employment or paperwork listing income and/or asset sources. Usually, the credit report would suffice. Indeed, no documentation loans were abundant. Anyone with semi-decent credit could get home financing, in the form of a jumbo loan even.
The proliferation of no documentation mortgage loans spelled disaster for the industry. With lenders being more than willing to originate loans sans thorough verification procedures suffered from too many defaults. These combined factors led to the 2008 mortgage crisis.
Though no documentation mortgages were common before 2008, they were often subject to enormous pricing adjustments. The loan-to-value (LTV) and combined-loan-to-value standards placed restrictions on the financing amount most borrowers could get.
Back then, an applicant who could only provide a credit report was only offered financing up to 80 percent of the CLTV. Meanwhile, those who wanted to refinance and had built equity on their home were not subjected to pricing adjustment.
No documentation mortgage loans still exist these days, however, lenders who offer them have become much more discerning of applicants. To qualify for one means having an excellent credit score and a remarkedly sizable income.
If you find yourself unable to meet qualified loan criteria, it’s best to seek out alternative options that are much more sound and attainable. Some that fall under the non-QM spectrum are interest only and stated income loans.