What is a mortgage without documents (without doc)?
No documentary mortgage (No Doc) has any evidence to support a borrower’s income. Instead, the loan is made on the basis of a statement confirming that the borrower can afford the loan payments. These mortgages are unregulated and do not meet the requirements of the Consumer Credit Protection Act to reasonably audit the borrower’s financial statements. The loan evaluation is mainly based on the resale potential of the secured property and the mortgage repayment structure.
Understanding the mortgage without documentation (No Doc)
No documentary mortgage (No Doc) was among the culprits of the financial collapse of 2008, which led to the Great Recession. However, mortgages are still available, which do not require tax returns for income documentation. Borrowers such as the self-employed, those whose income depends mainly on tips, and independent entrepreneurs may have difficulty documenting their income. Loans without doc fall into the Alt-A category of loan products.
Historically, no documents and other Alt-A loans were known for their high default levels, and their general defaults were a key factor leading to the 2008 subprime financial crisis. Dodd-Frank regulations now require more complete documentation on all types of loans and more particularly on mortgage loans. Now, bank statements and asset documentation are mandatory.
Other types of Alt-A loans like the undocumented mortgage include:
The low-doc loan required very little information about the borrowers. Lenders often granted these loans only to their customers’ credit scores.
Income and asset-less mortgage (NINA) mortgage programs do not require the borrower to disclose income or assets as part of the loan calculations. However, the lender checks the employment status of the borrower before issuing the loan.
The loan based on assets declared according to income (HIFIS) allows the borrower to declare his income without verification by the lender. These products are also called liar loans.
- NINJA loans, slang for credit given to a borrower with no income, no job and no assets, bypass the verification process.
The main users of mortgages without documentation
No-Doc and other Alt-A loans help homeowners and homeowners who have multiple expense write-offs on their tax returns to buy investment property without documenting their income in detail. But lenders providing unsolicited loans require borrowers to have excellent credit scores and high cash reserves to make large down payments. A borrower’s job check simply shows the monthly gross income on the application.
A deposit of at least 30% is required, and some mortgages can reach 35 to 50%. In comparison, most conventional mortgages require a 20% down payment. These mortgages also have a maximum loan to value ratio (LTV) of 70. 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 approve the loan. This business model is true for many mortgages because lenders see that the borrower is willing to offer a significant amount of capital. This high lump sum may mean that the borrower is less likely to default due to his considerable investment.
The interest rates for no Alt-A documentation and other products are generally higher than the rates for a traditional mortgage. Many of these limited documentation loans derive their security basis from the equity position in a property.