It was just a decade ago that millions of Americans took full advantage of no doc mortgages. Unfortunately, the default rate for these potentially dangerous products nearly pulled down the US real estate market.
As result, jump ahead ten years, and most lenders have gone from “no doc” to “all doc, all the time.”
Fortunately, as the lending landscape continues to loosen its grip, new alternatives for homeowners with nontraditional financing needs popped up.
What Is A No Doc Loan?
Pre-housing crisis, many lenders offered no doc loans to consumers who really had no way to repay them.
These popular mortgage loans were named according to their lack of documentation required. The loans required very few “docs.”
The most infamous of the no doc loans was the NINJA loan, with No Income, No Job or Asset verification required.
The borrower did have to indicate what his or her income was, but no one at the lender verified that this information was correct.
Unlike traditional mortgage programs, these loans were not based on a homeowner’s employment and income. They were based only on credit history, and sometimes assets.
How Other Things Became “Income” (Hint: They Didn’t)
The original idea behind no doc loans was to make purchasing a home easier for business owners. Many had plenty of cash flow, but their taxable income, used by most lenders for mortgage qualifying, wasn’t enough for the loans they wanted.
Typical “no doc” or “stated income” or “no income verification” loan guidelines included requirements that the applicants have at least six months of their claimed incomes in reserves. That’s some form of savings. So “savings” substituted for “income.”
Most loans also carried fairly high credit score minimums. The reasoning for this is that if you were clearly spending money, and having no problem paying the bills on time, you must have the income. Thus, FICO score became “income.”
Of course, people can borrow money to top up a reserve account, pay their bills by borrowing more, and have perfect credit without the means to buy an expensive house.
No Doc Left Behind
As these loans’ popularity increased, though, lenders and homeowners began pushing the envelope with no doc loans. And they scrapped many of their safety nets like larger down payments, higher minimum credit scores and increased reserves.
Subprime loans with high rates, high fees, no down payment requirement, and no income verification took over the market.
Eventually, as a consequence to these “liar loans” being abused, these defaulted loans became virtually extinct.
That left many scrambling for new loans that serve the original purpose of no and- no-doc mortgages, without the potential for abuse created by NINJAs.
The Ability To Repay And The QM Rule
To right the market, the Consumer Finance Protection Bureau (CFPB) introduced a few new rules for mortgage lenders.
The Bureau of Consumer Financial Protection amended Regulation Z, which implements the Truth in Lending (TILA). Regulation Z was amended to add the ability-to-repay (ATR) rule.
Generally, the ATR rule says lenders must make a reasonable, good faith determination of a homeowner’s ability to repay their new mortgage loan.
One way for lenders to follow the ability-to-repay rule is by making a “Qualified Mortgage” (QM).
A Qualified Mortgage is a category of loans that possess more certain, stable features, making it more likely that you’ll be able to afford your loan.
Non-Prime Loans Enter the Market
Due to the negative connotation associated with them, you’re rarely hear lenders say the word “subprime.”
The word “subprime” can be a bad word for many folks. It brings up difficult times in the mortgage and real estate industry — an era tied to the recession of 2008.
Non-prime has now taken the place of subprime. It is a term for mortgage products that do not fit into the constraints of government lending standards, or Qualified Mortgages.
Those who can’t qualify for traditional financing may find non-prime loans the perfect substitute.
Bank Statement Programs
For the self-employed or independent contractors of the world, the bank statement loan is an ideal loan product.
Bank statement programs are specifically designed for the self-employed and others whose tax returns and employment history may not show all the income available to them.
On paper, these mortgage applicants can appear riskier than they really are, because they don’t meet QM standards.
The bank statement program is designed to lessen this shortfall, determining an applicant’s ability to repay based on a more practical, case-by-case approach.
Instead of requiring years of tax documents, W-2s and paycheck stubs, lenders base approvals on a combination of bank statements and a profit & loss statement for your business.
Bank statement programs typically calculate income from 12 – 24 months of personal bank statement deposits.
In addition, some lenders allow you to include business bank statements.
Investor Cash Flow Products
Investment properties, also known as non-owner occupied properties, can provide profitable investment opportunities for the casual homeowner, as well as seasoned real estate investors.
However, what reality television doesn’t show you, is that getting the best possible financing terms for investment properties isn’t always easy.
With the investor cash flow program, no personal income is used to qualify. Lenders base qualification solely on the cash flow generated by the property.
Unlike traditional financing, there are no debt ratio restrictions.
Hard Money Lending
“Hard money” is financing available from private businesses or individuals for investing in real estate.
Real estate investors typically use hard money lenders when they are purchasing a property in need of work. This rehab work may make traditional financing impossible to obtain.
Hard money loans have several defining characteristics.
- Hard money can be beneficial for short term loan situations
- Lenders may assume that foreclosure will happen and base underwriting decisions on the value of the property.
- Almost all hard money loans come with terms ranging from 6 – 36 months.
- Many hard money lenders require no income verification.
Non-Prime Mortgage Program Caveats
In a mortgage lending era filled with stringent guidelines, non-prime loans can be a great alternative for anyone looking for a no doc mortgage.
The only catch for these great no doc mortgage substitutes is they usually come with their own set of stringent requirements.
You may find lenders with lower requirements, but most want a down payment of at least 20 percent.
Credit score requirements can range from excellent to as low as 500.
Interest rates for non-prime loans are several percentages points higher than those of prime loans.
Higher origination fees and closing costs almost always accompany these programs.
What Are Today’s Mortgage Rates?
Many of the estimated nine million self-employed professionals in the US who earn a decent living fall short of lenders’ income reporting requirements.
Fortunately for many these homeowners, and others who don’t fit the traditional financing mold, many great alternative financing options continue to emerge.