Low Documentation Loans
Not Just "Liar Loans"
Getting a mortgage involves a lot of paperwork. You need to document your income by providing paystubs, W2 forms, tax returns, statements from various accounts, and more. When your lender or mortgage broker hounds you for documentation it's a good sign -- they're trying to get the best mortgage you can qualify for.
However, some people can't produce the documents required. For them, a low-documentation (or no-documentation) loan is appealing, and those loans are still available to some.
Reasons for Low Documentation Loans
There are several reasons you might not be able to (or willing to) provide information to a lender. For example:
- Self employed people prefer to show lower income for tax purposes, but this backfires when applying for loans
- Young workers have a history of low wages, or no history whatsoever
- New business owners cannot show a past of consistent earnings (several years' worth is generally required)
- Retirees with investment income
- Privacy needs dictate that you keep your income level to yourself
- Finding and organizing documentation is too difficult
- Your income or assets are not documented in any way acceptable to the lender
Qualifying Without Documentation
The "good old days" of easy qualification are over. Before the financial crisis that peaked in 2008, you could simply tell your mortgage broker how much you earn, and little if any proof was required. Those "stated income" (also known as "liar loans") are no longer freely available.
The Consumer Financial Protection Bureau (CFPB) now requires lenders to ensure that you have the ability to repay any loans approved – if the mortgage is a “qualifying” loan. But some lenders are willing to work in the non-qualified mortgage space.
Note that these lenders are not looking to go back to 2006 – they aren’t interested in issuing subprime loans using inaccurate numbers. However, they are interested in working with people who have the ability to repay (while lacking the ability to document their income and assets in traditional formats).
To qualify for these loans, you need to be an attractive borrower, and the characteristics below will help you.
Good (or great) credit: again, low-documentation subprime loans are a thing of the past. Lenders are only willing to settle for less information if you’ve got great credit scores (above 720 is a good place to start). That said, if everything else is in good shape, a few dings on your credit reports might not ruin the deal.
Income: income always helps you get approved for a loan. But non-qualified lenders might be more lenient about evaluating your income. If you can make your case (even though you can’t produce a W2), you might get approved.
Assets: having plenty of backup money also helps your case. Large bank and investment accounts might serve as “reserves” you can dip into to keep making payments. Lenders may be more lenient about income if you’re strong on assets.
Equity: lenders like to minimize their risks, and to see that you’ve got skin in the game. If you make a larger down payment, you’ve got better chances with low documentation lenders. For conventional mortgages, 20% is sufficient, but 40% or more might be required with non-qualified lenders. You can always put that equity to use someday later.
There’s no such thing as a free lunch. Since you’re not proving your ability to repay using standard documents, lenders are taking more risk. These lenders are also taking more regulatory risk by working in grey (but still legal) areas. As a result, the price is higher.
Expect an interest rate that’s at least one percent higher for a low documentation loan. Other processing fees might also be inflated. If you’re just looking for an easier way to apply for a loan, this might not be the best option (dig up those old tax returns and paystubs). But if you fall into the categories listed above, it might be your only option and still worth the price.