What Is No Documentation (No Doc) Mortgage?
The term no documentation (no doc) mortgage refers to a loan that doesn't require income verification from the borrower. This type of loan is instead approved on a declaration that confirms the borrower can afford the loan payments. No doc mortgages are commonly given to those whose incomes aren't easily verified. Largely unregulated, these loans are mainly based on the resale potential of the secured property and the repayment structure of the mortgage.
- No documentation mortgages do not require income verification from the borrower.
- Borrowers provide lenders with a declaration that they can repay the loan.
- These loans are commonly granted to individuals who don't have a regular source of income including those who are self-employed.
- No doc mortgages are risky and were among the loans that were responsible for the financial crisis that led to the Great Recession.
- Lenders generally require higher down payments than traditional mortgages.
How No Documentation (No Doc) Mortgages Work
In order to qualify for a mortgage, borrowers are normally required to submit proof of income. This includes providing lenders with W2s, pay stubs, employment letters, bank statements, and/or recent tax returns. Lenders want to see that borrowers are able to afford payments on the loan by proving they have a stable and reliable source(s) of income. This is, of course, in addition to other factors such as a down payment and a suitable credit score.
Some mortgages, however, don't require any proof of income. These are called no documentation (no doc) mortgages, no documentation loans, or no income verification mortgages, With these loans, borrowers aren't required to provide any proof of income. Instead, they must simply provide a declaration that indicates they are able to repay the loan. These mortgages are commonly granted to people who don't have a regular income source, self-employed individuals, new immigrants, or temporary workers.
No documentation (no doc) mortgages do not meet the Consumer Credit Protection Act requirement to reasonably verify the borrower’s financials. Because they don't require income verification, these mortgages tend to be very risky. Dodd-Frank regulations now require greater documentation on all types of loans and specifically mortgage loans. Now, bank statements and asset documentation are requirements.
The Dodd-Frank Act brought forth changes to the lending environment after the Great Recession including the requirement of bank statements and asset documentation.
No doc loans fall into the Alt-A category of lending products. These, along with other Alt-A loans—loans that fall between prime and subprime mortgages—have been known for high levels of default, These mortgages were among the culprits of the financial collapse in 2008, which led to the Great Recession. However, mortgage loans are still available, which do not require tax returns for documentation of income. Other types of Alt-A loans include:
- Low documentation loan (low doc) requires very little information on borrowers. Lenders often extended these loans purely on their client's credit scores.
- No Income-No Asset (NINA). These mortgage programs do not require the borrower to disclose income or assets as part of loan calculations. However, the lender does verify the borrower's employment status before issuing the loan.
- Stated income-stated asset loans (SISAs) allow the borrower to state their income without verification by the lender. These products are also known as liar loans.
- NINJA loans, a slang term used for credit extended to a borrower with no income, no job, and no assets. This loan ignores the verification process.
No doc and other Alt-A loans help house flippers and landlords with multiple, expense write-offs on their tax returns to buy investment properties without thoroughly documenting their income. But lenders granting these loans require borrowers to have excellent credit scores and high cash reserves available to make large down payments. The verification of a borrowers’ employment merely states monthly gross income on the application.
Down payment requirements are also different when it comes to these mortgages. At least a 30% down payment is required, while other mortgages may be as much as 35% to 50%. In comparison, most conventional mortgages require a 20% down payment. Such mortgages also have a maximum 70 loan-to-value ratio (LTV). This ratio is calculated as the amount of the mortgage lien divided by the appraised value of the property, expressed as a percentage.
The higher the borrower’s down payment on the investment property, the easier it is to be approved for the loan. This business model holds true for many mortgages because lenders see that the borrower is willing to offer a significant amount of capital. This large lump sum payment may mean there is less likelihood that the borrower will default because of their considerable investment.
The interest rates for no documentation and other Alt-A products are usually higher than rates for a traditional mortgage loan. Many of these limited documentation loans take their security basis from the equity position in a property.