No Documentation (No Doc) Mortgages: How it Works, Types

What Is a 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.

Key Takeaways

  • No documentation mortgages do not require income verification from the borrower; instead, borrowers provide lenders with a declaration that they can repay the loan.
  • No doc mortgages are commonly granted to individuals who don't have a regular source of income including those who are self-employed.
  • Since the Great Recession, true no doc mortgages are rare—the term now applies to loans that do not require tax returns or other traditional income-verifying documents.
  • No doc mortgages generally require higher down payments and higher interest rates 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, 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 a lot of paperwork, like the docs mentioned above. 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. And they tend to be increasingly rare since the 2010 passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires documentation on all types of loans—especially mortgages.

Passed in the wake of the financial crisis of 2008, the Dodd-Frank Wall Street Reform and Consumer Protection Act instituted reforms and changes to the banking/financial industry, many of which focused on the lending business. Subprime mortgages and other high-risk loan products—notorious for their high levels of default—were considered among the main culprits of the crisis, which triggered the two-year Great Recession.

No Doc Mortgages Since 2010

In a sense, true no doc mortgages don't exist anymore: No lender will rely just on your word that you can repay the loan, as they did in the go-go years of the early 2000s. "Your organization must verify the information you rely on using reasonably reliable third-party records…you generally cannot rely on what consumers orally tell you about their income," states the Consumer Financial Protection Bureau (CFPB), a regulatory agency established by Dodd-Frank, in its compliance guide for lenders.

However, mortgage loans that do not require tax returns or other traditional income-verifying documents are still available. The lender lets you use other items, such as bank statements or brokerage statements, to show that you can meet your mortgage payments.

Special Considerations

No doc mortgages are commonly granted to individuals who don't have a regular source of income, including those who are self-employed, or whose wealth stems from investments or unearned-income sources. They 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. 

Types of No Document Mortgages

No doc mortgages fall into the Alt-A category of lending products. They are considered as falling in between prime and subprime mortgages in terms of risk.

Other types of Alt-A loans include:

  • Low documentation loans (low doc) require very little information on borrowers. Lenders often extended these loans purely on their client's credit scores.
  •  Stated-income, verified-assets loans (SIVA) are those for which lenders accept your assets as the basis for approval. They’re often called “bank statement loans.”
  • No-income, verified-assets loans (NIVA) are similar to SIVA loans, except income is not part of the equation (or the application).
  • 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 (SISA) allow the borrower to state their income and assets 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. Prevalent pre-Dodd Frank, this type is nearly extinct now, given that it ignores the verification process.

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. A mortgage calculator can be a good resource to budget for the monthly cost of your payment. 

Article Sources
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  1. Consumer Financial Protection Bureau. "Ability-to-Repay and Qualified Mortgage Rule: Small entity Compliance Guide." Accessed Jun. 14, 2021.

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