What’s a No-Doc Mortgage Loan?
Once upon a time, it was pretty common to hear about “no-doc” mortgage loans. As the name implies, these loans required little if any documentation to evaluate your creditworthiness and your ability to repay the loan.
While a number of lenders used these loans to make it easier for potential homeowners to get the money they needed, some lenders also abused no-doc mortgage loans to take advantage of a hot housing market. This practice eventually contributed to the financial crisis of the mid-2000s that kicked off the Great Recession; as a result, safeguards were put in place to make sure that lenders confirmed a potential borrower’s ability to repay the loan.
This doesn’t mean that some versions of no-doc mortgages aren’t still available, of course. These loans aren’t like the NINJA (No Income, No Job or Asset verification required) loans and other no-doc mortgages that predominated the pre-crisis landscape; they have to include government-mandated assurances of your ability to repay, after all. But they still manage to significantly reduce the paperwork involved with buying a house.
To clear up any confusion on the topic, here are some of the most common questions asked about modern no-doc mortgages.
Are They Really No-Doc Mortgages?
Most if not all of the “no-doc” loans you find aren’t completely free from documentation, since lenders still need to comply with legal requirements to ensure that you aren’t borrowing more than you can afford to repay. This was a major problem with NINJA loans, as unemployed individuals with no real assets or income could still theoretically qualify for some loans since they didn’t have to actually prove they could afford to borrow the money.
Legal requirements regarding a borrower’s ability to repay the loan do allow some leeway for lenders, so some loans are available where the amount of documentation required is minimal. Alternate forms of verification are also allowed in some cases, eliminating the need for traditional proofs of employment and other common loan documentation.
What About Alt-Doc Mortgages? Are They Different?
You may have heard mention of “alt-doc” mortgages or other types of “alt-doc” loans. These are essentially the same thing as modern no-doc loans and are a reference specifically to loans that allow alternate forms of documentation to verify a borrower’s ability to repay. Some of these loans are also referred to as “Alt-A” loans, which was another name given to some no-doc loans prior to the financial crisis. Regardless of whether they’re referred to as no-doc, low-doc, alt-doc or alt-A loans, the loan products you’re hearing about are all some variation of the no-doc loan concept.
Isn’t Documentation Required by Law?
Federal law does require lenders to collect information that proves an individual can afford to repay the money that they borrow. In most cases, this information includes things like proof of employment, proof of income level, and sometimes other financial data such as bank account information. But these particular forms of proof aren’t actually specified by the rule of law.
This means that lenders typically have enough wiggle room to set their own documentation requirements. Most of the top-tier loan products will require the standard documentation, and in exchange you’ll usually get the best interest rates and loan terms since the lender knows that you have a means to repay what you borrow. But lenders have the freedom to offer other loan products as well, letting you provide other forms of proof that you can repay the debt without having to document your income or financial holdings.
What Is Needed for a No-Doc Loan?
In most cases, getting a no-doc loan means that you will need to submit to a credit check to give the lender an idea of your credit history and how well you’ve repaid past debts. You may also need to provide past bank statements to give the lender a sense of your approximate monthly income, even if it’s just calculated by taking an average of your deposits. Alternate forms of proof may also be accepted, such as a letter from a professional who is familiar with your finances (like an accountant or an attorney).
While specific requirements for a no-doc loan will vary depending on your lender, one thing that is commonly required is a down payment on the home you wish to buy.
Different lenders may require different percentages of the home’s value as a down payment, but it’s not unheard of to need a down payment as high as 30% or more. This reduces the loan-to-value (LTV) ratio of the loan, making the total loan more affordable and protecting the lender from taking a loss if you should default on the loan.
What If You Are Self-Employed?
Mortgage loans are notoriously difficult for self-employed individuals to get, due in large part to the fact that the self-employed often lack paperwork such as paycheck stubs or other proof of employment. This is an instance where a no-doc loan could be very beneficial. Because you don’t have to provide those proofs, your likelihood of getting a mortgage loan is significantly increased.
In fact, some no-doc lenders actually market loan products specifically toward the self-employed. They know that self-employed individuals are likely to have problems getting a more traditional mortgage loan and may be willing to make a larger down payment or pay a higher interest rate to cut the hassle out of borrowing. On top of that, many self-employed people have sufficient records for their business to easily meet any alternate-document requirements that the lender might have.
Are No-Doc Mortgages Qualified?
Qualified loans are the darlings of the lending industry, meeting all government requirements and providing much-needed security in the form of lender certification. Unfortunately, to meet the requirements of a qualified loan, lenders have to verify specific income details before the loan is granted. No-doc loans don’t verify those details specifically, so this prevents the loans from being qualified loan products.
This doesn’t mean that no-doc loans are strictly bad, of course. While it’s easy to view qualified loans as “safe” and unqualified loans as “unsafe,” there are some loan products that are perfectly safe despite being unqualified. The current state of law goes a long way to prevent a repeat of the financial crisis, and this includes stopping lenders from issuing the same sort of risky loans that helped bring the housing market down in the 2000s. Even subprime loans, the loan products widely blamed for fueling the financial crisis, are starting to make a comeback as more consumer-friendly “non-prime” loans. Similar consumer protections exist to keep no-doc mortgages and other low-documentation loans from revisiting the bad old days of NINJA and other high-risk no-docs.
Can You Get a No-Doc Home Equity Loan?
There’s a lot of focus on using no-doc loans to buy a house, but what do you do if you already own your home? Can you use a no-doc loan to access some of the equity you’ve built up in your home over time? Of course you can. A no-doc home equity loan provides you with the same benefits as other no-doc loans while letting you use the equity you’ve created as you pay down your mortgage.
The process of applying for a no-doc home equity loan is similar to any other no-doc loan, though your lender may have additional requirements specific to this type of loan. These requirements typically involve homeowners insurance, though you may also need to provide proof that your original mortgage is still in good standing as well as information about the value of your equity. Some lenders may have additional requirements and may limit the amount of equity that you can borrow against to reduce their risk (similar to how no-doc lenders may require a higher down payment when you’re purchasing a home, which also reduces their risk).
What About a No-Doc HELOC?
If you have equity in your home but don’t need to borrow a large amount of money at once, you may be better off looking into a home equity line of credit (HELOC) instead of a regular home equity loan. Fortunately, this is another loan product that you can apply for as a no-doc loan. A no-doc HELOC functions similarly to a no-doc home equity loan and depending on your lender may have the same requirements as well.
The primary difference between a home equity loan and a HELOC lies in how they are used. With a home equity loan, you borrow an amount up front as you would do with just about any other loan. This is typically used as a way to make a single large purchase or a group of related purchases, or for specialized cases such as using the borrowed money to pay off several outstanding debts so that you’ll only have a single payment to keep track of. But with a HELOC, you have a line of credit that you can borrow against for a set period of time. This can be used to pay for home repairs over time, to make multiple purchases over the course of several months, or for a variety of other uses where you’ll spend money over time instead of using it all at once.
What Are Interest Rates Like?
In most cases, interest rates on no-doc mortgages are notably higher than what you’d see on more traditional mortgage loans. This is designed to reduce the risk that the lender takes on; by charging a higher interest rate, they are making more money off of the loan, reducing any losses they might take if you should default on the loan at a later point. The exact amount of interest you’re charged depends largely on the lender you choose, as some lenders will charge reasonable rates while others will take advantage of the situation and set their rates at the high end of the spectrum.
The interest rate you pay will also depend on the amount of your down payment and the type of loan that you take out. If you have a significant down payment, your interest rate will likely be lower because you’re already reducing the risk associated with your loan. Likewise, some types of loans lend themselves to lower interest rates.
One other factor that can affect the interest you pay is whether you select a fixed-rate loan or one with a variable rate such as a 5/1 adjustable-rate mortgage (ARM). Most of the time, you’ll end up with a better overall rate with a fixed-rate loan, though the ARM or a different variable-rate loan can be a good option for the short term. If you take out an adjustable loan, it’s generally a good idea to have plans to refinance or otherwise modify the loan before the adjustment period kicks in.
What Sort of Repayment Periods Are Offered?
The repayment terms for no-doc mortgages are pretty standard compared to other mortgage loans. The majority of the loans you see will be 15-year, 20-year or 30-year loans, with the 30-year repayment period being the most popular. This gives you plenty of time to repay the loan, though you’ll also be building interest during that entire time (and it will likely be at a higher rate than you’d see with other loan products that use standard documentation).
Because the loans aren’t qualified, you may see some less common loan periods as well. Though they aren’t something that every lender offers, it’s possible that you’ll see a 40-year mortgage or possibly an even longer term offered as a no-doc loan. These loans are often riskier than standard-term mortgages, and while there may be a case for taking out one of these loans in the short term (such as an introductory interest rate that saves you money during the introductory period), this is another loan that you would be best served by refinancing before it has a chance to get out of hand.
Do You Need Perfect Credit?
With many lenders, you need to have good credit to secure a no-doc loan. This is because there’s a higher risk associated with these loans, limiting the loans to those who are most likely to repay them without difficulty. There are some lenders who are willing to offer no-doc loans to those with fair or even recovering credit, but these cases are much less common than they used to be and generally involve higher interest rates and a high down payment.
This is one of the really big differences between modern no-doc loans and the no-doc mortgages of the pre-crisis era. Back then, a lot of no-doc loans were referred to as “liar’s loans” because people could blatantly lie about their income and means to repay the loan and still get the money they wanted to borrow. People with poor credit would use these loans to buy houses, doing their best to keep up with payments but eventually falling behind as other obligations ate into their income. Restricting no-doc mortgages to borrowers with better credit is one way that lenders try to avoid a repeat of that scenario.
Is a No-Doc Refinance Possible?
While a lot of the no-doc loans you see are primary loans (that is, loans taken out to purchase a property or make some other major purchase), it’s also possible to find no-doc refinance loans as well. These loans let you refinance an existing loan to extend the available repayment period, improve interest rates, or otherwise change the terms of your existing loan. The new loan repays the original in full, leaving you with only the new loan to repay.
It’s important to keep in mind that no-doc loans typically have higher interest rates than more traditional loans. For a no-doc refinance loan to really be a benefit, you should try to find a loan with a lower interest rate than what you’re already paying. If you don’t take the time to find the best loan for your situation, then you might end up paying more for your refinance than you were paying for your original loan.
How Do I Find a No-Doc Loan?
Since no-doc loans often feature higher interest rates and aren’t qualified loan products, it’s really important to take your time and compare different lenders to find the best fit for your situation. Shop around and get loan quotes from different lenders, looking not only at the interest rate and down payment but also at exactly what sort of proofs are required to take out the loan in the first place. If the loan has an adjustable interest rate, look at how long you have until the adjustment period kicks in as well.
No-doc mortgages and similar loans can be great in some situations, especially if you’re self-employed or otherwise have issues with taking out a more traditional loan. If you aren’t careful, though, these loans can cost you a lot of money as well. Taking your time and looking for the loan that best fits your needs (and your finances) is really important here, as differences in interest rates and repayment terms can save (or cost) you thousands of dollars over the course of the loan.