What is a No Documentation Mortgage (No Doc)
The no documentation mortgage (No Doc) has no supporting evidence of a borrower's income. Instead, the loan realizes based on a declaration confirming the borrower can afford the loan payments. These mortgages are unregulated and do not meet the Consumer Credit Protection Act requirement to verify the borrower’s financials reasonably. The assessment of the loan is based mainly on the resale potential of the secured property and the repayment structure of the mortgage.
BREAKING DOWN No Documentation Mortgage (No Doc)
The no documentation mortgage (No Doc) 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. Borrowers such as self-employed persons, those whose income mainly rely on tips, and independent contractors may have difficulty documenting their income. No-Doc loans fall into the Alt-A category of lending products.
Historically no documentation and other Alt-A loans have been known for high levels of default, and their widespread defaults were a key factor leading to the 2008 subprime lending, financial crisis. Dodd-Frank regulations now require greater documentation on all types of loans and specifically mortgage loans. Now, bank statements and asset documentation are requirements.
Other types of Alt-A loans like the no documentation mortgage include:
- Low documentation loan (Low-Doc) required very little information on borrowers. Lenders often extended these loans purely on their client's credit scores.
- No Income-No Asset (NINA) 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 loan (SISA) allows the borrower to state their income without verification by the lender. These products are also known as liar loans.
- NINJA loans, slang for a credit extended to a borrower with no income, no job, and no assets, ignores the verification process.
The Main Users of No Documentation Mortgages
No-Doc and other Alt-A loans helps house flippers and landlords who have multiple expense write-offs on their tax returns to buy investment properties without thoroughly documenting their income. But lenders granting No-Doc 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.
At least a 30-percent down payment is required, and some mortgages may be as much as 35- to 50-percent. In comparison, most conventional mortgages require a 20-percent down payment. Such mortgages also have a maximum 70 loan-to-value ratio (LTV). The LTV 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.