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About No Doc Mortgage
If you are thinking of applying for a mortgage to buy a property, you have many loan programs available at your disposal.
Most of these loans would require income documentation as the lender would need to know if the borrower applying for the loan is making enough money to repay the loan.
However, there is one mortgage loan that does not require income documentation or verification. In this post, we will understand what a no-doc loan is in detail.
What Is A No Doc Mortgage?
No doc mortgage, also known as low doc, no- income-verification, or stated-income mortgage is a type of private money loan program in which the borrower is not required to submit tax returns or verification of income.
Instead, these loan programs are approved based on an agreement from the lender that the borrower can repay the loan in the future.
Because income is not easily verifiable, it is common for people (including self-employed borrowers) who do not have a regular income to choose to go for this type of mortgage.
Although this type of mortgage is risky, there are generally no regulations and the borrowers have to pay higher down payments compared to a traditional mortgage.
How Does A No Doc Loan Work?
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.
What Are The Benefits of No Doc Mortgage?
- They facilitate financial access to real estate investors who wish to invest. It might be difficult to qualify for conventional loans if you have multiple investment properties, not to forget never ending documents. No documentation mortgage can be a way forward in such cases.
- As this is an asset-based mortgage, and not much documentation is required, the closing time for the loan is faster than any other conventional loan.
What Are The Disadvantages of No Doc Mortgage?
- These types of loans are difficult to apply for due to their scarcity. There aren’t many banks or lenders that provide such kinds of mortgages. Therefore, it can be difficult to find a lender that offers no income doc loans.
- Since the lender faces high risk in these mortgages, they would require the borrower to make higher down payments. Also, the interest rates on these loans might be higher compared to other conventional products.
Conclusion
No doc mortgage could be a good option for investors and self-employed individuals; however, it is difficult to find a lender who provides this type of mortgage.
You can search online for lenders who are providing such kinds of loans or speak to your trusted mortgage advisor for such options.
