In a regular mortgage, the borrower needs to provide income documentation for income qualification.
To prove your income qualification the lender would require your recent paystubs, W2s, and/or tax returns.
Lenders want borrowers to be able to repay their loans by proving that they have a consistent and dependable income.
Of course, this is in addition to other parameters that are required for a borrower to qualify such as loan to value, debt-to-income, and decent credit scores.
However, some mortgage loan programs may not require proof of income which is called a no-doc mortgage. In this type of mortgage, the borrower has fewer documents to provide.
Instead, the lender would request a declaration from the borrower stating that he or she would be able to repay the mortgage.
These loans are generally given and are best suited to individuals with no source of income, the self-employed, temporary workers, or new immigrants.
No documentation mortgages do not comply with the Consumer Credit Protection Act which states the lender should verify the potential borrower’s finances.
As there is no income verification required, these types of mortgages are risky for lenders. Since 2010 after the execution of the Dodd-Frank Wall Street Reforms and Consumer protection act, no doc mortgages have become less popular.
This is due to the guidelines stating all mortgages are required to have all the documentation.