Real Estate Guide

Your Mortgage - Questions and Answers
'Easy-Qualifier Loans'

• What are low-doc and no-doc loans?
• Can someone who is unemployed get a loan?
• Are Reduced Documentation Loans risky?

What are low-doc and no-doc loans?

"No-doc" loans are mortgages for which lenders require very little loan documentation as long as the borrower puts down a sizable down payment, generally 25 percent or more. These mortgages are common among self-employed people who say they earn a certain amount of money but whose tax returns show that their earnings are much lower.

There are three main flavors of low-doc and no-doc loans.

1. Stated-income loans.  This loan may be right for people that are self-employed or make a living solely from commissions or tips (real estate salespeople and wait-persons)
    
2. No-ratio loans.  This loan is often chosen by people with a wealth of assets but because their financial situations are very complex their income is uncertain or in flux.  It might be right for a retiree whose only income is investments. It may also work for those whose live are in transition because of divorce, death of a husband or wife, career change, or boost in future earning because of a recent educational degree (MD's).
    
3. No-doc or NINA (no income/no asset verification) If your willing to pay for it and your credit is high enough you can get this type of loan.

For the privilege of  a low doc loan, you will first have to have a very high credit score, usually come up with a more than average down payment, and be willing to pay a higher interest rate. Experts agree that of the many people who think they must have a low-doc/no-doc loan, very few actually need one. The more credible lenders will generally try to steer clients away from them simply because they cost more. With the help of a good loan officer, you usually can, and should, find a way to borrow conventionally.

Can someone who is unemployed get a loan?

It goes without saying that lenders are loath to lend money to anyone who doesn't have means to repay it. Unemployed persons would seemingly have no way of making monthly mortgage payments.  However, there are (or were) home loans for which lenders required very little loan documentation as long as the borrower puts down a sizable down payment, generally 25 percent or more.

A NINJA loan is a type of sub-prime loan issued to borrowers with 'No Income, No Job or Assets.' They were especially prominent during the housing bubble of the 2000s but have become notorious due to the sub-prime mortgage crisis that reared it's ugly head in mid 2007. They are now nearly impossible to obtain.

A NINA loan ('No Income No Asset'), however is still widely available. These reduced documentation loans (so-called "low-doc," "no-doc," or "stated income loans") are common among self-employed people who say they earn a certain amount of money but whose income tax returns show that their earnings are much lower.

Low- and no-doc loans aren’t a way to get around low credit scores. In fact, NINA programs are reserved for the most credit-worthy of borrowers. This means, among other criteria: a satisfactory mortgage history  (no late mortgage payments in the last 24 months); a minimum credit score of 660 (and rising as we speak); and a down payment of at least 25%. For higher loan amounts the minimum credit scores start above 700 with down payments of about 40%. It should also be said the this type of loan is only for folks with a wealth of assets and not for marginal borrowers.

'No Income No Asset' (NINA) is one of many documentation types which lenders may allow when underwriting a mortgage; however since the the mortgage 'melt down' of July/August '07, underwriters have been far more stringent in requirements for a stated-income-loan and increasingly fewer will even consider such a loan.

Are Reduced Documentation Loans risky?

BEWARE, ‘stated loans’ are becoming a large problem under the realm of mortgage fraud and predatory lending tactics.

Qualifying for a Stated Income Loan is largely at the discretion of the mortgage broker, who is supposed to diligently verify that the  borrower makes more in gross income than they can document. An example would be a  self-employed borrower who has taken a significant tax write-off . The borrower,  while enjoying the benefits of reduced taxes, cannot now verity significant income. The mortgage broker, in this instance may be inclined to issue a stated income loan.

The lender recognizes that the borrower 'could' be taking home more money than the IRS taxes, however, during the housing bubble of the 2000s many brokers used "no doc" loans as a tool to qualify a borrower even though they knew the borrower did not meet income requirements (thus the name 'liar's loan' came to be). This is a version of mortgage fraud and should be avoided. Do not let a mortgage broker put you in a "low doc" or "no doc" loan if you do not make enough money (using the lenders prescribed debt to income ratio as a benchmark) to make the mortgage payment. There is almost always a conventional loan available that will avoid the pitfalls.