Home ownership means different things to different people: independence, an investment, or laying down roots, to name a few. The path to home ownership can be challenging, however. An irregular income, an unstable employment situation, or a lack of qualifying documentation can make it difficult to get a mortgage through most banks. If you find yourself in this situation, you may want to consider a no doc loan.
What Is a No Doc Loan?
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The meaning of “no doc loan” has changed since 2008. Originally, a no doc loan was a mortgage loan for which you didn’t have to provide documentation. In place of bank statements, pay stubs, or other forms of income verification, you could simply sign a document that stated your income. During the mortgage crisis of the late 2000s, these loans came under scrutiny because they were high risk and often given to people who were unable to make their monthly mortgage payments. Many people did, indeed, default on their loans, which contributed to the financial collapse of 2008-2009.
Legislation introduced in the wake of the mortgage crisis prohibits lending institutions from approving mortgage loans without any documentation of the borrower’s ability to repay the loan. While no doc loans are no longer truly document-free, you can apply for a no doc mortgage loan using fewer documents than you would need for a standard mortgage.
How Do No Doc Loans Work?
When you apply for a standard mortgage, you have to provide proof of a stable, regular income. This proof is normally in the form of W2s, employment letters, tax returns, pay stubs, and bank statements. The lending institution uses this information, along with your credit score and your down payment, when deciding whether to approve your mortgage application. The more confidence they have that you will be able to make your monthly mortgage payments, the more likely your application will be approved with a favorable interest rate.
For a no doc loan, you do not have to provide proof of income, such as a W2 or pay stubs. You will be required to demonstrate financial stability with, for example, bank statements or asset documentation. These help the lending institution assess your ability to repay the mortgage. You should be aware that since these loans are considered high risk, you may find that your interest rate is higher than with a regular mortgage. It’s also possible the lending institution will ask for a larger down payment.
Why Might You Want a No Doc Loan?
There are a number of reasons why you might want a no doc loan. These include:
- Fluctuating income: If you do not have a regular income, or your income changes from paycheck to paycheck, you may find it hard to get a traditional mortgage. Since a no doc loan does not require you to provide income statements, your irregular income can’t count against you. This is particularly relevant if you are self-employed and paying yourself from the business. If the business is new, there will be months when your paychecks will be small or non-existent.
- New to the workforce: If you are young and don’t have a long work history or you are currently on a low income, this kind of mortgage loan might be appealing. As long as you can show you are in good financial health, you will not need to disclose how little you make. Such a disclosure would probably disqualify you for a traditional mortgage, but you may be able to get a no doc mortgage loan.
- No longer need to work: You may have reached a point in life where you have a high net worth and no longer need to work. Although you have no income, you have enough wealth in the bank or in assets to cover mortgage payments. A traditional mortgage would require you to demonstrate proof of income. For a no doc mortgage loan, you may qualify on the basis of your bank statement and assets alone.
- Simplicity: Gathering all the necessary documentation for a traditional mortgage application can be time consuming. If you are working multiple jobs or you have a lot of time commitments, you may prefer the simplicity of a no doc loan. With minimal documentation requirements, you can complete your application quickly.
- Privacy: You may not want to disclose more information to the lender than you have to, especially with regard to your income. For example, you may be using an inheritance to secure the loan, or your income statements and tax returns may paint a misleading picture of your financial health.
How Can You Get a No Doc Loan?
If you are going to qualify for a no doc loan, you need to make yourself as attractive to the lending institution as possible. Ways you can do this include:
- Maintain a good credit score. Lenders regularly use credit scores to help evaluate a borrower’s ability to repay loans. Without evidence of income, a good credit score is especially important to the lender. If you can maintain a credit score above 720, the lender is more likely to approve your no doc loan application.
- Have strong assets. You may not have much by way of regular income, but if you have strong assets, you may qualify for a no doc mortgage loan. These assets can be in the form of property or large bank and investment accounts you can use to help make your monthly payments.
- Make a large down payment. If you apply for a traditional mortgage, the lending institution may require up to 20% as a down payment. For a no doc mortgage loan, you should consider putting more money down — as much as 40%, if you can afford it. This reduces the risk to the lender and shows good faith on your part.
An irregular income, or no income at all, doesn’t have to stop you from getting a mortgage. If you are in good financial health, a no doc loan may be the answer to your dreams of home ownership.