Stated Income & No Doc Loans

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Stated Income & No Doc Mortgage Loans

aka Limited Doc Mortgages - Let You Maintain Your Privacy

If you do not derive your income from a paycheck or you do not desire to disclose all to a lender, you can still obtain a mortgage, but this does not necessarily mean that you need to pay more. Here's how.

Homebuyers that work for an employer and receive a regular paycheck are usually willing to divulge details of their finances in exchange for the best mortgage terms available. Many buyers, however, do not have a steady steam of income; they may own their own business, work on a commission basis, live off investments, receive unreported income in cash, etc. And others, simply, treasure their financial privacy. For these borrowers, "limited documentation" mortgages are best.

They are called "limited doc" or "low doc" mortgages because they describe the amount of documentation required by the lender. The terminology does not mean the same to all lenders, however. Some low doc (or reduced doc) mortgages still require the borrower to provide lots of paperwork similar to a full doc loan, such as tax returns and profit-and-loss statements, etc. A "no-doc" mortgage requires at least a credit report and an appraisal.

Borrowers pay for the flexibility and privacy of these types of mortgages through tradeoffs. Depending on your goals, many of these trade-offs may in fact not be trade-offs at all, but in your best interest depending on your situation and goals. By not having to provide full disclosure, borrowers are willing to accept shorter-term rate guarantees and sometimes prepayment penalties, as well as higher down payment requirements. Everything depends on the borrower's credit, their flexibility and goals, and how the mortgage broker structures the transaction. Keep in mind that not all mortgage brokers are created equal either. Certainly a mortgage broker must make a living, but unfortunately too many are more interested in structuring your financing for maximum benefit to themselves.

The Price of Privacy

Low doc and no doc loans do not have to cost more if the borrower is willing to be flexible and take on some risk versus taking on a high rate 30-year fixed loan. Before applying for a mortgage, it is critical to consider all options, which is oftentimes difficult because many mortgage brokers are not knowledgeable enough and or do not want to put the extra effort into creating the most beneficial financing structure for the borrower. A good loan officer can help you make the various mortgages available fit your situation rather that requiring you to accept undesirable rates and loan terms. But of course, if you are caught between the proverbially "rock and the hard place" the best that a good loan officer can do is damage control, which means getting you the best terms (i.e. tradeoffs) with your given situation.

There are three main types of low doc - no doc mortgages.

Stated-Income mortgages: for people who work but do not receive income in the form of wages or salary from an employer; this includes self-employed people and those who earn a living from commissions or tips.
No Ratio loans for wealthy people with complex finances, retired folks living off investments those who have had a recent divorce, a death of a spouse, or career change.
No Doc Mortgage Loans (no income/no asset verification) mortgages are for creditworthy people who want maximum privacy.

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Stated Income Mortgage Loans

Someone who gets a stated income mortgage must "state" their monthly income. Instead of backing up the income statement with pay stubs and IRS W-2 forms, the borrower may have to provide 2 to 24-months of bank statements and or a CPA letter or business licenses.

Stated income mortgages are for people who generate income which is difficult to document such as waiters and waitresses who received much of their income in the form of tips, and there are those that work for cash. Stated income mortgages are also beneficial for self-employed borrowers who make substantial incomes, but expense much of their income on their taxes. Their ability to pay is not an issue, but their taxable income does not reflect their "real" income.

Lenders evaluate borrower's on the basis of what is called the front and back ratio. The front ratio is the borrower's mortgage payment on their residence, which is called PITI (Principal (if applicable), Interest, Tax and Insurance) versus the borrower(s) monthly income. The back-end ratio includes PITI plus all of the borrower's other monthly debts (e.g. credit cards, car loans or leases, etc) versus borrower's monthly income.

Generally, the interest rate on a stated income mortgage is about a half-point above the comparable rate for a conventional "full doc" mortgage with all things being equal. There are many factors that affect a borrower's interest rate, namely: income stability, front and back debt-to-income ratios, FICO score, the down payment and the appraisal. On a stated income mortgage, depending on these factors, a borrower could expect to pay anywhere from one-eighth to more than 1 percentage point above the full doc rate.

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No Ratio Mortgages

With these mortgages, the borrower does not disclose income; pay stubs, W-2s, or tax returns are NOT required.

These are called no ratio mortgages because the lender does not compute the debt-to-income ratio because the lender does not know the borrower's income. Although the borrower's debts are listed on the credit report, the lender is only interested in whether they were paid in a timely manner, and their are no collections, judgments, or liens pending. The borrower, however, lists assets such as cash in banks, CDs, stocks, bonds, cash value in life insurance policies, equity in businesses, real estate, retirement plans, autos, etc.

The purpose of the no ratio program is to provide expedited processing for creditworthy borrowers. It is not intended as a means to qualify marginal borrowers. Someone who owns a chain of a dozen hotels might apply for a no ratio mortgage because a "full doc" conventional loan would require that the borrower submit personal and corporate tax returns, a year-to-date profit-and-loss, and balance sheet for all businesses owned. It would likely cost him/her more to assemble the information from his accountant than pay a higher interest rate.

This type of loan is also conducive to someone undergoing big life change, such as a divorce, death of a spouse, a career switch or retirement, all of which could reduce their earning ability until they get back on track making money again. These loans also for those that cherish privacy, and are willing to pay a premium rate for it. The rate for a no ratio mortgage could be anywhere from one-half point to three points above the rate for a conventional mortgage depending on credit score, size of down payment and the appraised value.

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No Income - No Asset Verification Mortgages

These loans, also called NINAs, require the least amount of documentation. The borrower provides his/her name, Social Security number, the amount of the down payment and the address of the property being bought. The broker/lender obtains a credit report, property title report and an appraisal.

The line gets fuzzy between no ratio and NINA mortgages. The borrower's credit score is the key. The better the score, the less documentation required. Often, the lender will want to know what the buyer does for a living, and for how long. Lenders feel more confident of regular timely payments when a borrower has been doing the same job for at least two years.

These mortgages are best for people who never, ever fail to pay bills on time. They have a full time bookkeeper on staff to insure the bills are paid on time. They are meant for people who zealously guard their privacy -- the rock star who does not want someone in the loan office selling copies of his/her tax return to one of the unscrupulous tabloids. The less documentation, however, means either a higher rate, or more tradeoffs.

Mortgage lending is all about "layers of risk:" 1) the size of the down payment -- the bigger the down payment, the lower the risk and the lower the interest rate; 2) credit score, 3) willingness to show ownership of assets, and 4) the degree of disclosure regarding how the borrower earns income.

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