The housing market was hot in the early and mid-2000’s, as most of us remember. That was when no documentation home loans became popular. In 2019 it seems that no doc mortgage loans may be making a comeback of sorts. Banks, credit unions and lenders are introducing new more aggressive home buying programs with limited and reduced income documentation required. People love that no doc loans are typically easier to process and in many cases escrow can close faster than with traditional mortgages.
No Doc Mortgage Loans Are Streamlining the Home Buying Process!
The reason is that home prices increased so much in many areas that people could no longer qualify for regular mortgage loans. The lender then used no documentation loans to get them in a house. The no doc mortgage options and no income verification loans were popular programs before the default rates kicked in. Of course as the U.S. economy improves more and more mortgage lenders will be announcing new stated income loans and no-doc mortgage programs with new opportunities for borrowers in all 50 states.
This looks like a great year for new home buyers looking for no doc home loans and mortgages with reduced income documentation required.
A no doc mortgage usually meant there was no employment, income or asset verification. The borrower was qualifying for a home loan almost entirely on their credit history, and the no doc mortgage lender used that to decide whether to approve or reject. As you can guess, many of the failed mortgages from this era were no doc loans, also known as a stated income mortgage. As loan as the borrower had average or better credit, they could get a home loan, and even a jumbo loan.
Before the mortgage mess, there were many subprime mortgage-lenders who would offer these no doc loans. Many lenders only let you finance 80% of the value of the house if you had no documentation. However, if you were doing a refinance and you had equity, you could sometimes take out a new mortgage with no documentation and also avoid getting a higher rate.
Those no doc loans are gone. However, just because the mortgage crash killed the no doc mortgage market, this is not to say that you cannot get a limited income documentation loan today. You can. Whether you want to or not will depend upon your financial situation and your credit. In 2017 the no doc loans are available for borrowers that lenders consider a lower risk factor than in the past.
Limited Documentation and No Doc Loans
With very limited exceptions, it’s very difficult to get a no documentation loan today. The only way is if you have 740 or higher credit. After all they have nothing else to go on if you are not submitting financial docs.
But you should know that there will be a pricing adjustment for a no-income loan if the loan to value is 80%. You should expect that you could pay as much as a 2% rate premium to get the limited or no doc loan.
So if the current rate is 4%, you will likely pay as high a rate as 6% to get your limited doc or no doc loan.
Is this worth it for many home buyers? It might be or it might not. But let’s assume that you do want to get a limited documentation home loan in 2018. Here are some reasons to consider it:
#1 You Really Need to Buy a House Now
There are some situations where it is imperative that you become a home owner today. You may need to own real estate in the US for an immigration purpose. Or you may need to buy a home so that you can enjoy the tax advantages in April; some people need a major tax write off quickly and will want to buy a home to write off mortgage interest. Buying a home with zero down-payment loan can be tricky if are unable to document your income for the underwriter. Most no documentation mortgage programs will require a down-payment.
#2 Mortgage Rates Are Still Low on No Doc Loans
Since Trump won office, there has been a small but significant rise in interest rates. The Federal Reserve raised rates in December 2016. There is a decent chance that there will be another rate hike in 2019. The Fed has indicated as such, and the markets have priced two rate hikes into the current rates.
For a 30 year fixed mortgage today, you are looking at a low 4% rate. This is still very low, historically. But if the Fed follows through and raises rates, you will be paying higher rates soon. And with a premium of 2% on top of the rate for a low doc loan, getting your loan could become expensive. It is important when shopping for the best no doc mortgage that you get the lowest rate with the least amount of fees possible.
#3 Inflation Is Rising
A possible sign of a heating up economy is inflation which was near a high in February 2017 for several years. Increasing inflation is often a sign of rising economic activity. This means you will probably see rates rise soon. So anyone who wants a limited documentation loan soon, will be better off to act fast. It makes sense to speak with no doc mortgage lenders now while these types of programs are actually available.
#4 Trump Effect?
The stock market is rising fast, and has gone up 11% since Trump won office. The IMF has increased estimates of GDP growth for 2018 and 2019, so we think the rates will climb higher. This will cost you more for your limited doc loan.
Another option you may want to consider is to get a state income home loan. In this case, you would state your income each month on your application. Like the no doc loans, you would not verify the amount with financial documentation.
This is a simpler way to get a mortgage that is normally for self-employed borrowers with more complicated tax situations.
The lender would not check your income, but you will still need to verify that you are gainfully employed. If self-employed, you may need to get a letter from a CPA vouching that you are self-employed.
Keep in mind on a stated income application that your stated income needs to be realistic for your job. If you are a teacher and you claim an income of $15,000 per month, you will probably be declined. People looking for no doc loans need to be more reasonable.
More Thoughts on the No Doc Mortgage Loan
Limited income documentation loans are possible and now could be a good time to get one before the interest rates climb much higher. You will be paying a much higher rate if rates go up another percentage point in 2019.
Alternative Income Verification Loans
Another option to stated income loans today is the alternative income verification loan. This type of loan is still new, but it is growing in popularity. This is a popular option for many workers who are self-employed. Many of these workers may not have W-2s and pays-tubs that lenders usually require.
This type of no doc loan will allow the borrower to qualify for the loan by using a year of business bank statements. You also can supply your personal bank statements. With these documents, the lender is able to make a cash flow analysis to determine the likelihood of you being able to pay the loan.
The lender will use this documentation to determine how much your positive cash flow is. Most no doc mortgage companies also require you to provide a profit and loss statement that matches with the bank statements you provided.
To get this type of loan, you will usually need to have at least a FICO score of 620. The maximum loan to value is normally 75%, so you have to have more than a 20% down payment.
You can expect to pay a 1% higher interest rate for this loan. It is only offered in some states right now but should be in more in the near future.
Considerations with No Doc Mortgage Loans
If you are a self-employed worker and you want to get a stated income or alternative income verification loan, it is recommended that you keep these ideas at top of mind:
- For the two years before you get your loan, you should be sure that you are not mixing business funds with personal funds. You should have separate bank accounts for your personal and business affairs. You also should have a business credit card that you use to purchase equipment.
- Try to have stable income for the two years before you get a loan. There will naturally be some seasonal variation, but you should have an income that is roughly the same for the last two years before you apply for a mortgage.
- Take fewer business deductions in the two years before you get a mortgage. You will pay more in taxes, but you want to be able to claim a higher level of income so that you can get a mortgage.
Getting a no doc mortgage loan in 2018 is more difficult to find than it was when Bush was President, but it is still a viable option for people who are unable to clearly document their income.
How to Buy Home with a No Income Documentation Loan and a Competitive Mortgage Rate
No income documentation home loans were popular in the early 2000’s. Many mortgage lenders provided loans to people who had a minimum credit score without verifying their income. The no doc mortgage lenders would be the first to tell you that these loans were in some cases elevated risk, and many borrowers got these no doc home loans and had trouble paying on them.
Today, loans with no income documentation are still available in a limited fashion. If you are interested in a loan with no income documentation or less documentation, below is some helpful information as you look for financing:
No Income Documentation Harder to Get
There are some lenders who have loans with less income documentation required. In many cases, they are available only to people who are self-employed.
Many people who are self-employed are not able to get a regular mortgage because they do not have w-2s and pay stubs from a conventional employer. To get a mortgage, they usually need to provide tax returns for the last two years and a profit and loss statement for the current tax year. They also in some cases provide proof of their income with bank statements.
With those documents, most self-employed workers can get a home loan if they have a good enough credit score. For the self-employed who do not have that documentation, it is possible in some cases to get a home loan without documentation. Generally, these loans are available to borrowers with a high credit score and a large down payment. You should expect in these cases to have to put down at least 20% or possibly more on your home.
Today there are home loans available where you can show your income by just providing your bank statements. This type of low doc home loan can be appropriate for people who do not have tax returns that show income. This can be the case where you have a lot of tax write offs so that you do not have a high level of income on paper. If you are able to prove by your bank statements that you can afford a home loan, you may be able to be approved at a low interest rate.
Tips for No Income Documentation and Stated Income Home Loans
If you can get approved potentially for a no income documentation loan, it is very important to be honest about your income. Many people can be tempted by a lovely home to state that they make more money than they really do. This is a major reason why we had the last financial crisis.
It is important to take a very honest approach to your income and debt. Make sure that you look at all the additional costs of home ownership, such as mortgage insurance, taxes and homeowner’s insurance.
Many no income documentation loans will carry higher interest rates. This is necessary as it is a higher risk loan for the no doc lender. You may find that it makes more sense in the end to provide proof of your income. Even if you do not have w-2’s and pay stubs, you can provide proof of your income with tax returns and a profit and loss statement. With these documents, getting a home loan at a low interest rate is quite easy.
Still, these days, interest rates are very low and you may be able to get a low document mortgage loan at a fairly low interest rate. Even though rates did rise somewhat at the end of last year, in 2018, interest rates remain near record low’s. So, even if you get a higher interest loan, you should be able to do better than a few years ago.
Some financial experts think that the rates will rise in the next two years. Although the economy still has not taken off as fast as some expected in the Trump era, there is belief that the rising stock market will lead to higher economic performance soon. This will probably cause rates to rise in the coming years. So, for those who are thinking about a no income documentation loan, or a low documentation loan, now may be the time to pull the trigger.
Less is More When It Comes to Documenting Income for Loan Purposes
People like to get low doc or no income verification mortgage because it is faster to get the loan processed and closed. These no income verification loans also are helpful for people who work largely in cash and do not have a lot of paperwork that document their income.
To get a limited documentation or stated income loan today, you will need to keep a few things in mind. First, you will have to have a good credit score. Unless you have a lot of equity, you should expect that if you have limited income documentation, you will need a credit score of above 700. Why? Because if you cannot clearly show that you have steady income with tax returns, pay stubs and bank statements, what else does the lender have to go on to know that you will pay back the loan? If you have 25 to 40% or more equity in your home, then lenders are more willing to take risks on no income loans for people with bad credit.
Also, be aware that getting a low doc or no documentation loan can come at a price. In some instances, you could pay as much as 2% more on your mortgage interest rate if you do not have much in the way of documentation of your income. For example, if the current mortgage rate is 4%, you might pay 5.5 or 6% or more for a low doc loan. That seems high in a sense, but keep in mind that you are getting a home loan and no longer renting. That is a major financial benefit. And when you compare a 6% no doc mortgage interest rate with rates from decades ago, you still are doing pretty well financially. Rates back in the old days in the 80’s were over 10%! Is it worth it to get a no doc or low doc loan? It depends upon your situation.
There is no question that a limited doc loan will cost you more than a traditional mortgage. But for some people, this is something they need to do and the stated income loan provides a quicker and easier path to getting approved. In this type of loan, you will simply state your income for each month on the loan application and you do not have to prove it with pay stubs or tax returns. The ‘stated mortgage’ is a common loan program for self-employed borrowers whose income varies a lot. You may make the loan approval process easier if you can provide bank statements or investment account statements that prove that you hold substantial assets.
The Bottom Line on Home Buying with a No Doc Mortgage Option
It is harder to obtain a no income documentation loan today. The best way to do so is to have a very high credit score and a 30% down payment or even more. Still, you will pay a higher interest rate.
Those who want this type of loan may be better off with a low documentation loan, such as one where they only verify your income with bank statements. There are more of these types of no doc mortgage lenders today than lenders who truly do not document your income at all.
It is possible during the Trump administration that more home loans will become available with less documentation required. But we do not think we will ever return to the days of truly no documentation loans at very low interest rates.