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Low Doc / No Doc Mortgages

Low Doc / No Doc Mortgages

As their name would imply, low doc loans and no doc loans are mortgage loans that require less than full documentation of income, employment, and assets. The name is a bit of a misnomer, because the borrower still has to fill out an application (although they actually have to fill out less of the application), and at least a credit report is pulled on the borrower. The borrower will also have an appraisal done on the property that is being purchased.

Low and no doc loans cover a broad spectrum of required documentation. Following are the more popular low and no doc mortgage programs:

  • Stated income loans - A stated income loan is one in which the borrower simply has to state their income without providing any documentation of their income. This type of loan can be useful for individuals who are self employed or who have a lot of unreported cash income that cannot be documented. On a stated income loan, the borrower must still list their assets and debts and provide the backing documentation. The lender does verify employment and a credit report is pulled by the lender. A stated income loan may also be referred to as a no income verification (NIV) loan.
  • Stated asset loans - A stated asset loan is one in which the borrower simply has to state their assets without providing any documentation of their assets, which are not verified. On a stated asset loan, the borrower must still provide income information with backing documentation. The lender will verify employment and pull a credit report on the borrower.
  • Stated income/stated assets - This is the combination of the two previous loan programs. In this program the borrower simply states their income and assets which are not verified. Debt information is still provided by the borrower, employment is verified by the lender, and a credit report is pulled by the lender.
  • No ratio loans - A no ratio loan is one in which the borrower does not provide any income information. Because of this, neither the housing ratio or the debt ratio can be calculated for the borrower. Asset information is provided by the borrower with backing documentation. The lender verifies employment and pulls a credit report on the borrower.
  • No income/no asset loans - No income/no asset loans, also referred to as NINA loans, are loans that require almost no documentation. In this instance, the borrower simply fills out an application with their personal information and information about the house they are purchasing including down payment information. With these loans, the lender pulls a credit report on the borrower, obtains an appraisal on the house being purchased, and verifies the borrower's employment.
  • No doc loan - A no doc loan is one where a borrower is applying for a mortgage on the strength of their down payment and their credit. No income, employment, asset, or debt information is provided. The lender simply pulls a credit report and has the house being purchased appraised.

These types of loans represent increasing levels of risk to lenders. Because of this, there are several things that lenders do to help mitigate their risk, including:

  • More stringent down payment requirements - lenders may require higher down payments of 20, 25%, or more.
  • Higher credit requirements - lenders may require substantially higher credit scores than they would for full doc loans.
  • Higher interest rates - lenders will charge higher interest rates than they would for a comparable full doc loan. Lenders take two things into account when determining their interest rate adjustments for low doc/no doc loans. They consider the size of the down payment, and they consider how little documentation they are receiving. As a general rule of thumb, the lower the down payment, the higher the interest rate adjustment. Also, the less documentation provided the higher the interest rate adjustment. Thus, a no doc loan with a small down payment would receive the highest interest rate adjustment. Interest rate adjustments on low doc/no doc loans can range from as little as .15 to 3.

Low doc/No doc loans are not for everyone. They serve a specific purpose. They make it easier for people whose income is difficult to verify to obtain a loan. They are also helpful to the very wealthy for whom providing the documentation would be viewed as either burdensome or intrusive.

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