When it comes to no-doc mortgage loans, the devil is in the details. Or lack thereof.

These complex mortgages, known for no/low documentation, are adverse of traditional mortgage loans in almost every way. How so? They require no verification of income, making it entirely possible to buy a home without providing W-2s, pay stubs, tax returns, or other documents.

Does it sound too good to be true? Well today, it mostly is.

While no-doc loans were popular among mortgage lenders prior to the 2008 financial crisis, they’re no longer a lending instrument typically extended to even the most qualified borrowers. Here’s why.

A Brief History On No-Doc Mortgage Loans

If you ask a financial expert, no-doc mortgages were a big culprit of the financial crisis in 2008, which ultimately led to the Great Recession. According to Oxford Academic’s Review of Finance, complex-mortgage borrowers — including those with no-doc loans — were delinquent on their mortgages at rates twice as high as borrowers with regular fixed-rate contracts.

Essentially, these loans worked by having applicants simply state their income rather than having it verified (earning the moniker “liar loans”). It’s the reason why no-doc loans have also been referred to as “stated-income loans.” Their popularity surged as lenders relaxed underwriting standards and real estate prices surged, inevitably leading homebuyers to believe home values would continue to rise indefinitely. Obviously, that wasn’t the case and no-doc/no-income loans became less and less popular.

Who was hurt the most in this scenario? Folks whose income and assets are often less stringently documented, including the seasonally employed, the self-employed, and independent contractors who used to take advantage of these loans.

As mortgage defaults skyrocketed and lenders tightened the belt, no-doc loans as we knew them began to quickly disappear.

The Types of No-Doc Mortgage Loans

While no-doc mortgage loans are much harder to get, Fox Business says they haven’t disappeared entirely. Instead, they’re more commonly referenced as a mortgage with “alternative methods” for determining income.

There are four main variations of no-doc mortgage loans, and they included:

  • SISA – Stated-income or Stated-Asset loans, which were the most popular no-doc loans. They were made without any formal verification of a borrower’s income.
  • SIVA – Stated-income, Verified-Assets loans. Typically, applicants made a list of their assets for lenders used as the basis for loan approval. These have also been termed “bank statement loans.”
  • NIVA – No-Income, Verified-Assets loans were used for applicants whose income could not be verified.
  • NINA – No-Income, No-Asset loans have the fewest requirements of all, and were meant for applicants who could not prove either income or existing assets.

Today, no-doc mortgage loans might be an option only if you’re talking to lenders who aren’t held to qualified mortgage rules by government agencies (such as Fannie Mae or Freddie Mac). That means potential homebuyers will have to approach direct lenders, wholesale lenders, and large financial investment firms to potentially lock-in this type of loan.

So, No-Doc Loans Are Still Available?

In a nutshell, the answer is not “yes” or “no.” The safe answer to this question is, “It’s complicated.”

Technically, no-doc loans are illegal. According to Bankrate, they violate a key requirement that lenders must be able to verify the ability of the borrower to repay a mortgage.

However, there are those aforementioned big direct lenders and wholesale lenders who might be able to make that kind of commitment to buyers seeking a no-doc loan. Because of the added risk, they’ll still likely ask for:

– Bank statements: According to Lending Tree, lenders are likely to calculate your income based on an average of deposits made into a personal or business account over a 12-to-24 month period.

– Credit report(s): Lenders are likely to require a much higher credit score when structuring no-doc mortgages.

– A big down payment: Break out your checkbook. The down payment minimum on a no-doc mortgage starts at 20% but could be higher (in some cases, much higher) depending on the lender.

– A deal structured with higher interest rates: Because you’re largely foregoing any documentation, lenders are going to charge higher rates for the loan than you’d pay for a regular mortgage.

Who Would Benefit From a No-Doc Mortgage?

Borrowers who have difficulty documenting their income would still be the prime benefactors of no-doc mortgage loans. This usually means those who are self-employed and cannot provide standard documentation the way a normal borrower can.

The Wall Street Journal highlighted the story of a nursing student and part-time caregiver in early 2019 who verified her earnings with 12 months of bank statements and letters from clients. In this instance, the borrower was able to secure a $610,000 home loan while also collecting rent from roommates and Airbnb guests, covering more than two-thirds of her roughly $4,300 in monthly payments.

There also might be other mitigating factors besides simply being ‘self-employed.’ Experts say these borrowers are typically using alternate means to secure a loan, such as inheritance because they have fluctuating income from owning their own business. They also look to no-doc loans because they know they can’t qualify as a self-employed borrower based on net income listed on tax returns.

Others who might benefit from a no-doc mortgage include real estate investors, who might qualify based on projected rent they’re likely to make on a property, as well as those who have what can be deemed a ‘high net worth’ without a job. In that case, you might be able to obtain a mortgage loan by listing assets or converting them into qualifying income.

The Bottom Line

The Consumer Financial Protection Bureau is an agency tasked with enforcing what are known as ability-to-repay laws set by the government. Any qualified mortgage must meet the minimum requirements outlined — with regular income documentation. This ensures that anyone taking on a mortgage can pay it back while still meeting other monthly payment obligations.

Today’s version of a no-income/no-doc loan still requires some proof of assets and/or cash flow to prevent unfair or abusive loan terms against the borrower. It also protects any borrower who may feel coerced into unfair loan terms through deceptive tactics or unscrupulous actions.

In many cases, you might not be able to find a lender to offer a no-doc mortgage loan. That doesn’t mean you can’t buy a home, especially if you’re self-employed. Rest assured, it’s still possible to qualify for a traditional mortgage loan, including conventional loans, VA loans, FHA or USDA-backed loans, and more. What you’ll need to keep in mind going forward is that traditional lenders will require a substantial amount of documentation and have a much more thorough underwriting process. You’ll be asked to submit the confidential information you may have been avoiding by trying to secure a no-doc mortgage, with the lender scrutinizing your credit, job history, bank statements, and more.

If you’re still planning to turn to a lender who can facilitate an unconventional loan, buyer beware. Regulators and consumer advocates fear renewed risk to the housing market, that Wall Street Journal story warned. It cited the director of federal advocacy at the Center for Responsible Lending as saying “affordability concerns” are still there for anyone pursuing such a loan. 

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