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No Doc Home Mortgage Loans — How do they Work?

To get a mortgage without any income documentation sounds too good to be true, right? It might even sound predatory.

It’s not.

While no doc home mortgage loans fizzled for a bit after the housing crisis, they are back and better than ever.

Today they’are called non-QM loans and more lenders are offering them due to the large influx of self-employed borrowers that exist since the pandemic.

Since self-employed borrowers typically don’t have the income on paper to get qualified for a mortgage, they are often overlooked in the lending world. With no doc mortgage loans, though, borrowers have more options today.

What is a No Doc Home Loan?

A no doc home loan, as the name suggests, requires much less documentation than a standard loan from a bank.

You must still prove you can afford the loan, that requirement didn’t go away. But you can do so in an alternative way. In other words, you don’t have to prove you have the W-2 income or that your tax returns shows enough adjusted gross income.

You can have tax returns that show a loss and still get approved.

Here’s how.

With no doc home mortgage loans, mortgage lenders look at your bank statements or other alternative documentation to prove your income. So, it’s not that you don’t need income – you do. You can just prove it in different ways – that lenders deem suitable.

Lenders still calculate your debt-to-income ratio and require you to have a down payment, but the way they calculate and qualify your income doesn’t just require pay stubs or a W-2.

How do no Doc Home Loans Work?

No doc home loans are just like any other home loan except you don’t need to prove your income the traditional way.

Lenders still look for enough proof that you can afford the loan, have a history of paying your bills on time, and that you have enough money invested in the loan yourself to make your payments on time.

You’ll go through an underwriting process, providing the underwriter with the required documentation to clear your conditions. Some of the conditions may be less traditional though, so pay close attention to the documents required of you.

Once the underwriter clears your loan to close, you will sign the mortgage deed, note, and other closing paperwork and receive the keys to your new home.

Who Qualifies for a No Doc Home Loan?

To get a mortgage without any income documentation sounds too good to be true, right? It might even sound predatory.

Not everyone needs a no doc home loan, but those that do usually report a loss on their tax returns or earn their income in some way other than a standard employer.

A few examples of who would benefit from a no doc home loan includes:

  • Self-employed borrowers
  • Real estate investors
  • Doctors or lawyers that own their own practice
  • Borrowers living off investment income rather than employment income

Types of No Doc Home Mortgage Loans

Like traditional loans, there are several types of no doc home mortgage loans to choose from,
each of which caters to your unique situation.

Bank Statement Home Loan

Business owners often have tax returns that don’t reflect their accurate income, but their bank statements do. Mortgage lenders look for 12 to 24 months of bank statements that show regular receipt of income.

If you can prove you have regular income and can afford the mortgage loan beyond a reasonable doubt, you may get approved with your bank statements alone.

Asset Depletion Loans

If you live off assets you’ve already accumulated, you may qualify for the asset depletion loan.

This loan breaks your assets down into annual income amounts to determine how much loan
you can afford.

No Income, No Asset Loans

If you’re buying a rental property, you may qualify for a No Income, No Asset loan.

These loans are only for investment properties. Mortgage lenders base how much you can afford on the
projected rent for the home.

Qualifying for a No Doc Home Mortgage Loan

Since no doc home mortgage loans are private loans, each lender has its own requirements. In general, though, expect the following:

  • Large down payment – You’ll likely need at least 20% – 30% down on the home, maybe more. The large down payment helps offset the risk of the non-traditional income mortgage lenders except for this type of loan.

The less you borrow compared to the home’s value, the higher your chances of approval become.

  • Average credit – You don’t need perfect credit, but it should be decent enough to show that you’re financially responsible. Lenders vary with the credit score they require, but anything over a 680 is usually a feasible credit score for these mortgage loans.
  • Low debt-to-income ratio – Since mortgage lenders take a risk lending to you without traditional income documentation, they typically want a lower DTI. Every lender has adifferent requirement but try keeping your DTI at 43% or less of your income.

It’s always a good idea to have compensating factors too. These are factors that offset anything risky, such as not providing traditional income documentation.

Compensating factors often include great credit scores, exceptionally low debt ratios, or even liquid assets on hand to cover your mortgage payment for 12 – 24 months. Any proof you can provide that you are a good risk will increase your chances of approval.

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Final Thoughts

No doc home mortgage loans are a great way to get the loan you need if you don’t have traditional income. You don’t have to wait until you have enough cash to buy a home or keep renting because you can’t get approved any longer.

Mortgage lenders offer many types of no doc mortgage loans so people in most situations can get approved for a loan. Be prepared to provide ample documentation of your income the alternative way, but at least you don’t have to rely on pay stubs, W-2s and tax returns to get approved.

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