Non-Qualified Loan

Documents Required for a Home Loan

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If you are self-employed, work on commission, or otherwise have irregular income, you might think it’s impossible to get a mortgage with full documentation. If you can’t prove regular income, a lender won’t want to give you a loan, right?

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Luckily, there are ways around it. While you may not be able to get conventional financing, you may be able to get a home loan with limited documentation.

Just what does this mean? Keep reading to find out more.

Verifying Your Income

The largest piece of the puzzle when applying for a mortgage is typically your income. It makes sense; lenders need to know that you can pay the loan back in full. They don’t want to give a loan to someone that might have trouble making the payments.

But what happens if you have irregular income or you can’t verify your self-employment income with your tax returns because of the write-offs that you take? You can use limited documentation. While this doesn’t mean ‘no documentation,’ it just means that you verify your income in some other way.

The traditional way to verify income is with your pay stubs, W-2s, and/or tax returns. If you know these documents won’t help you look like a ‘stable borrower,’ you may be able to verify your income with your bank statements instead. Lenders are able to accept bank statements for borrowers that regularly deposit their income in one bank account and that can provide proof that it’s their income.

Just why would bank statements be better than tax returns? It’s for one good reason – deductions. As a self-employed borrower or even borrower that works on commission, you have the right to take many deductions on your taxes. Unfortunately, mortgage lenders must use your adjusted gross income according to your tax returns. If you take so many write-offs that you make your AGI zero or negative, it would be impossible to qualify for a loan.

When you can use your bank statements, you can show lenders the amount of money you actually bring in because it’s deposited in your bank account. As long as lenders can tell that it’s your income and not money from any other source, they can use it.

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Verifying Compensating Factors

Accepting limited documentation is a big risk for lenders. In order for them to allow it, they need to see other compensating factors or factors that make your loan less risky. These include:

  • High credit score – show lenders that you are a good risk by having a high credit score. Lenders want to know that you pay your bills on time and don’t overextend your credit. A high credit score will give them this reassurance.
  • Low debt ratio – Lenders want to know that your monthly income isn’t spread thin. They want you to have disposable income in order to cover the cost of living. They also want to know that you aren’t in over your head in debt.
  • Assets – If you have money in savings or even in liquid investments, they can count as reserves. This is money the lender counts as what you could use to make your mortgage payment should your income decrease or stop. The more money you have available in reserves, the better your chances of approval become.

Finding a Lender

The hardest part of getting a limited documentation loan is finding an appropriate lender. You won’t get a conventional or even government-backed loan with limited documentation. Instead, you’ll need to use an alternative or subprime lender.

Don’t let the name scare you – they are literally just lenders that write their own programs and keep the loans on their own books. In other words, they don’t have to answer to any other investors. They can make their own rules, which may or may not include the ability to accept limited documentation.

You should shop around with at least three lenders to see what they have to offer. Since this is a portfolio loan program, you may find the terms and costs of the loan very different between lenders.

Getting a home loan with limited documentation is possible, you just have to be diligent in your efforts. Make sure to set up your qualifying factors as well as you can before you apply so that lenders see you as a good risk right from the start.

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What are No Doc Loans?

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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.

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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.

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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.

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Qualification Requirements for Stated Asset Loans

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If you need an alternative document loan, you will have to meet certain requirements. First, you will need to find a lender that is even willing to write this type of loan. After the housing crisis, most lenders pulled out of the stated income/stated asset arena. They didn’t want to take the chance of dealing with defaulted loans.

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Today, though, more and more lenders are willing to write stated assets loans. Just how do you increase your chances of approval on one? Keep reading to find out more.

Have a High Credit Score

First, you need a high credit score. If you want a lender to take your word on your income or assets, you have to give them reason to do so. Think of the difference between a borrower with a high credit score and one with a low credit score.

The borrower with the high credit score probably manages his money correctly. He doesn’t overextend his credit or pay his bills late. Lenders look at him as a good risk. The borrower with a low credit score may not manage his money correctly. He may overextend his credit or pay his bills late. His credit history is typically filled with negative information that makes a lender wary of giving him a loan.

If you think about the risk of a lender offering a stated income or stated asset loan, they are taking your word for what you make or have. They take a much larger risk doing this for a borrower that doesn’t have a decent credit history. Making sure you have a high credit score before you apply for this type of loan can increase your chances of approval.

Have a Low Debt Ratio

A low debt ratio goes hand-in-hand with a high credit score. The more debt you have outstanding, the higher the risk of default you pose to a lender. You may find that it’s harder to find a willing lender when you have a high debt ratio.

This doesn’t mean that you can’t have any debt outstanding, but you should try to minimize the amount you have outstanding before you apply for the loan. If you have credit card debt, try to pay the balances off in full. If you aren’t able to pay them off in full, at the very least, try to get your balances paid down enough so that they are less than 30% of your total credit limit. Once you owe more than 30% of your credit limit, it’s a red flag to lenders, making them less likely to give you a loan.

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Have Stable Employment

Even if you are applying for a stated income loan, you still need to prove your employment. Lenders want to know that you have stability and reliability when it comes to your income. The longer you are at your job, the more stability you show a lender.

Ideally, you should have at least 2 years at the same job. This shows lenders that you are consistent with your efforts to stay at your job. It also gives you room for raises, putting you in a better financial situation moving forward. If you don’t have a 2-year history at the same job, you’ll need to explain why you made changes. Did you better yourself by taking a higher position? Did you go back to school to start in a different industry?

Your lender will need to know the exact reason you changed jobs so that they can gauge your ability to be successful at the new job. Since your job is the source of your income, your lender will need to make sure beyond a reasonable doubt that you are able to succeed in your chosen profession.

You can increase your chances of getting a stated asset loan by making sure all qualifying factors go above and beyond what the lender wants to see. Just meeting the basic guidelines isn’t enough. Lenders need to know that you are a good risk and that you don’t pose a high risk of default.

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A Primer Into Refinancing with Negative Equity

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A Primer Into Refinancing with Negative Equity

Having a negative equity means you owe more on your house than it is worth in the current market. This remains a problem among many Americans. Good to know there are existing refinance options that can provide you a way out of this terrible financial condition.

But first, you need to evaluate the gravity of the situation. This will help you determine whether refinancing is really the better option. Sometimes, a drop in your neighborhood’s home values does not automatically mean you already have a negative equity on your home. Other times, the decline of home values is only temporary and they rise back up without the need for alarm.

To know if refinancing is the best option for your current equity dilemma, it’s best to talk with a professional who can offer you insights on current market trends and possible future estimates. He or she will also walk you through the process and its potential costs.

Speak with your lender

Most of the time, your lenders are willing to negotiate the terms of your loan in order to keep your business. There are various refinance programs available today, but your lender might give you an option that addresses your unique needs.

They may be in the form of a refinance program or a mortgage modification which modifies the terms of the loan to accommodate the change in your situation. Such a modification can include:

    • Stretching your loan term
    • Lowering your interest rate
    • Writing off principal

These might sound too ideal but are not unheard of.

Consider government-insured loans

It might be hard to find conventional lenders who will approve your refinance application. In this case, turn your focus into government-backed refi programs such as FHA’s and VA’s streamline refinance programs. These refi options usually have looser guidelines and can give you the loan you need without verifying your income, assets, or home value. However, you have to prove to the lenders that you have good payment history.

Refinancing under the FHA and VA, however, cannot proceed if the refinance will not result in a better outcome for the borrower. That is the main goal of the refinance. It can be in the form of a lower payment, or a lower interest.

Gear up

Now that you know your options, you can start prepping for the move. There’s work to be done and delaying it might not be a wise option.

Consult with a professional today for further guidance.

A Roundup of Mortgages for Today’s Self-Employed

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It’s not that they don’t have adequate income/assets to take on a mortgage. It’s just that self-employed borrowers can’t show in pay stubs, Form W2s, and sometimes tax returns their ability to repay their loans. There are a number of mortgages that are made for or admit the self-employed professionals of today. Here’s a non-definitive list of loans starting from those requiring no income verification.

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Option 1: No Income Verification Loans

Also known as no doc and stated income loans, these mortgages are underwritten based on your credit score, employment history, and down payment. Credit scores required can be in the 700 range and equity at 40%.

Lenders will verify your self-employment and in lieu of W2s and pay stubs, your personal and business bank statements good for a year. These bank statements should match your income statements.

With the financial regulatory reform of recent years, stated income loans are not the liar loans of the past. Their documentation may not be full but lenders compensate it with other factors as mentioned above.

Option 2: Bank Statement Loans

These loans are akin to stated income loans, requiring a 12-month history of individual and/or business bank statements. LTV can be between 75% and 80% as it varies per lender.

Typical requirements are business license and related permits, tax returns and tax return transcripts. There may be other requirements that depend on, among other things, the length of your self-employment history, e.g. two years or less.

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Option 3: Conventional Loans

While loans sold to GSEs Fannie Mae and Freddie Mac require full documentation (they still do), they have loosened up their guidelines for the self-employed.

For Fannie Mae’s part, a self-employed borrower’s income can be verified using his/her individual or business tax returns or both for the past two years, as applicable. The self-employed borrower, which is defined by Fannie as “ any individual who has a 25% or greater ownership interest in a business,” will need to show two years’ worth of prior income as proof that this source of earnings will likely continue. Those who have been self-employed recently may provide their latest federal tax returns.

Back in September, Freddie Mac introduced a pilot program for first-time homebuyers with low income and alternate income sources like self-employed professionals.

Option 4: FHA Loans

Two years seems to be the “magic” number for mortgages for the self-employed as FHA loans also require that you should have a steady flow of self-employment income for the last two years. This will be shown by duly signed and dated tax returns and schedules for the past two years. Income statements and balance sheets are also required.

Take note that the FHA requires full documentation but the perks can be worth it. For one, your down payment could be as low as 3.5% depending on your credit score.

These are just some options that you can look into when shopping for mortgages. Lenders may offer you other options, talk to one today!»

What You Need to Know About No Documentation Mortgage Loans

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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.

Pricing adjustments

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.

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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.

Alternative loans

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.

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