The Return Of “Alternative” Mortgage Products
Before the housing collapse of 2008, NINJA loans were a popular alternative to the traditional mortgage. The NINJA mortgage — No Income, Job or Asset verification — was also called a “no doc mortgage.” That sounds pretty crazy, doesn’t it?
Well, maybe not if you’re a specialty lender who is comfortable with alternative documentation practices.
Similar products are now back in the market. It could be a good time to see if you qualify.
What Is A No Doc Mortgage?
In its purest form, a no doc mortgage only requires a mortgage application and a signature. No pay stubs, bank statements or tax returns are needed. The original purpose of the loan was to make qualifying easier for applicants whose income and / or assets were difficult to verify in the traditional way.
They were not supposed to be the “liar’s loans” they turned into. When you sign a loan application, you’re certifying that everything on it is factual, whether backed up by documents or not. However, many people used the NINJA to get loans they could not afford.
This is no longer allowed.
The Ability To Repay (ATR) Rule
Under the Ability-to-Repay rule, all new mortgages must comply with basic requirements that protect consumers from taking on loans they can’t afford. Lenders must determine that an applicant can repay a loan before they can approve it.
Lenders don’t have to verify income the same way Fannie Mae does to comply with this rule. But they do have to make sure the loan is affordable.
This means they might determine your income by analyzing your bank statements and averaging your deposits, or getting a letter from your accountant or tax attorney. There are many ways to look at income that don’t require tax returns and a DNA sample.
Alt Doc Loans
“There are hundreds of scenarios in which people truly make enough money for a mortgage, but documentation doesn’t fit squarely into a peg,” says Steve Schnall, CEO at Quontic Bank in Queens, N.Y. His bank offers these loans, which are called “alt doc” or “lite doc” mortgages.
“If you have 35 to 40 percent to put for the down payment, and you have perfect credit, instead of collecting your tax return we check credentials from your CPA,” he says.
For well-off borrowers with complicated finances, alt-doc mortgages can be a lifesaver. They needn’t supply every statement and supporting piece of paper for their personal, partnership and corporate tax returns, and the piles of paperwork generated by their investments.
How To Qualify With Alt Doc
“We’ve been very successful with our borrower population. We haven’t had any delinquencies since starting this in early 2016,” Schnall says. “And we don’t plan on having any.”
Alt or Lite doc loans are not the crazy products from years ago — with no verification of any kind, no down payment, and no minimum FICO score. Schnall explains that his bank requires:
- 35-40 percent down payment – significantly more than needed for a traditional mortgage
- 700 minimum FICO
- Savings of at least 12 months of principal, interest, taxes and insurance after closing
Schnall’s bank is designated as a community development financial institution (CDFI) through a small U.S. Treasury program which funds economic revitalization in low-income communities.
“We have to originate the loans ourselves, “Schnall explains. “So, we get to know our customers. We lend in our community that we serve.”
Where To Find Alt Doc Mortgages
Mortgages with alternative methods for determining income are widely available, but they are harder to find than plain vanilla loans.
Smaller lenders, local lenders and specialty lenders are more likely to carry these products. Groups of investors are increasingly putting money into this part of the mortgage market, which yields larger profits than traditional financing.
What Do Alt Doc Mortgages Cost?
Lenders view loans with less documentation as riskier than traditional mortgages. In addition, the demand for alt doc home loans is high.
Both of the above factors cause alt doc loans to be more expensive than standard conforming or government-backed mortgages. Expect your interest rate to be about two percent higher than you’d pay for a standard loan.
What Are Today’s Mortgage Rates?
Current mortgage rates are so low that even alt doc loans are affordable. Your alt doc rate depends on the size of your down payment, your credit score and the lender’s policy.
It may be harder to get several quotes from alt doc lenders, because they are harder to find. However, it’s even more important, because pricing varies more among lenders that don’t sell their loans to Fannie Mae and Freddie Mac.