No Document Loans: Understanding Your Options
Understanding No Document Loans
Are you a self-employed homebuyer looking to qualify for a no document loan? It can be daunting to understand how and where to apply, especially if you don’t have access to traditional sources of income documentation. The good news is that there are several reliable ways for self-employed homeowners like yourself to obtain financing with little or no paperwork involved—all it takes is knowing your options, doing your research, and applying for the right kind of mortgage! In this blog post, you’ll learn more about what a no-document loan entails, plus valuable tips on using online resources in order to secure funding while maintaining privacy quickly. Get ready –we’re going to show you how easy qualifying for a no-doc mortgage can be!
Benefits of No Document Loans
A no-document loan, also known as a Non-QM mortgage, is the perfect solution for self-employed borrowers, real estate investors, and anyone with non-traditional income sources looking for credit but don’t have tax returns or paystubs, or W2s to show their income. This loan allows borrowers to buy a home with less documentation than traditional mortgages and potentially even lower down payment. Because banks and traditional mortgage companies often require tax returns to prove income, borrowers who need these loans won’t find them at those locations. Fortunately, there are now more options for borrowers seeking no-document loans and the freedom that comes with it.
Types of No Doc or Non-QM Mortgages
- Bank Statement & P&L Loans– are exactly what they sound like, a mortgage loan that qualifies a borrower based on the activity in their bank statement.
- 24-month bank statement
- 12-month bank statement
- 3 months’ bank statements- yes, you read this correctly. Some lenders will only require three months of bank statements, AS LONG AS you put down their determined down payment, and you can prove you have been self-employed for at least two years, for example.
- Income-based solely on a CPA P&L provided
- DSCR- (Debt Service Coverage Ratio)– these loans were made for real estate investors who are purchasing a property that will be used as a rental. With traditional mortgages, a buyer must qualify to purchase a rental property based on their W2 & other personal income. The anticipated rent on a rental is not always allowed to be used, which causes problems for some buyers. With the DSCR loans, no personal income is factored into qualifying. Instead, the lender is looking at and qualifying the borrower based on the potential of the property. The loan uses the current lease or anticipated lease (outlined by the appraiser) as the income. They divide the lease amount by the new mortgage’s payment. It looks like the following:
Current Lease= $1,500Appraisal Rent Estimate = $1,400* lenders will take the lesser of the above two amounts.PITI = $1,200DSCR = $1,400/$1,200 = 1.16Most lenders who offer DSCR loans set a minimum ratio that the property must meet. The most common ratio we see is 1%, but some lenders will accept loans with lower ratios - 1099 Loans – were created for borrowers once W2 and have switched over to getting paid as a 1099 contractor.
- Asset Depletion Loans- qualify a borrower based on the amount of money they have in their bank accounts.
- ITIN loans-
In addition to the main categories of no doc or non-QM loans outlined above, it is also essential to understand the options available with many of these loans.
Loan Amounts- most of the loan programs above contain some restrictions that traditional loans do not always have, such as setting minimum loan amounts. The reason for this is that the investor providing the money that funds the mortgages does not feel it is worth lending unless the loan amount they determine is met.
Tradeline requirements: Many non-QM lenders will set their own requirements with what they feel comfortable with regarding credit. This means someone with a good credit score of 720 could not qualify unless they meet the tradeline requirement set.
Ex. 3 trade lines > 24 months – means that on the credit report, the lender wants to see 3 active and current accounts that have at least 24 months of payments reported.
Prepayment Penalty- are not uncommon with non-QM loans. They are more likely to have loans for investment properties, which is typical of commercial loan financing. Make sure that you understand the penalty on the loan before closing in case you want to refinance at some point.
Loan Term Options:
- IO- interest only
- ARMs- Adjustable Rate Mortgage
- 5/1 Arms
- 7/1 Arms
- Interest only 5/1
Now that you have a good idea of what non-QM and no-doc loans are, where do you go to find these loans? The biggest mistake I see most self-employed borrowers make is going to their business bank to find them. It makes sense that the institution that has helped us get a business up and running and holds all of our money would be able to get us to the finish line when wanting to buy a house, but the opposite is true.
Most banks, depository banks that we walk into and who we have our business bank accounts with, will not have what you need when applying for a mortgage as a self-employed borrower.
Qualifying for a No Document Loan
For those looking to find the right mortgage loan for their needs, no doc or Non-QM loans may be the solution. Despite their name, these loans do still require documentation – credit history, proof of income and down payment information serve as some examples of what lenders look at when deciding if an applicant qualifies. Fortunately, these loan programs are more lenient than traditional mortgages in terms of credit history and proof of income, as they allow stated-income and self-employed borrowers to provide only verification that they actually have enough money to close and meet any obligations every month. No doc or non-QM mortgage loans are an excellent option for those who might not otherwise qualify for a traditional mortgage loan due to their credit history or income situation.
Finding Lenders for No Document Loans
Searching for mortgage lenders who offer no-document loans can be daunting, but good news exists. The best option to find the specific program you’re looking for is mortgage brokers. They specialize in helping people get the right lender and product suited to their needs. Mortgage brokers have relationships with various alternative lenders and banks outside of traditional banking institutions, meaning a greater depth to choose from. With mortgage brokers, you can find every type of loan and excellent customer service and guidance throughout your purchase or refinance process.
Required Paperwork for a No Document Loan
Applying for a no-document loan can be less time-consuming, as you don’t need to provide lengthy paperwork like a traditional loan. All you need to do is complete and submit the loan application which includes financial documents such as your pay stubs and bank statements. However, it may require additional paperwork depending on the type of credit profile that emerges after examining your financial information. Besides providing financial documents, if you are a self-employed borrower, then lenders might request some tax returns from you. Additionally, homeowners applying for a no-document loan may provide proof of ownership if necessary. So even though less paperwork is required for this loan process, still certain documents must be provided when applying for such loans.
Some of the information you may be asked for when applying for one of these loans:
- Bank Statements- all loan types ask for bank statements to prove where the down payment and closing costs are coming from. Non-QM mortgages are no exception and can actually ask for more bank statements than traditional mortgages.
- Letter of Explanation from CPA – This is needed by a prospective lender that vets a borrower’s financial health at the time they apply for a home loan.
- Letter of Explanation from Borrowers- Even if you haven’t been asked to write a letter of explanation, I suggest you write one anyway. No one knows your situation better than you do.
- Credit Report- There isn’t a mortgage loan offered that does not want to see some credit report when applying for a new loan.
- Appraisal- every type of non-QM and no-doc loan that I have used requires an appraisal, so don’t expect to get this requirement waived when the lenders are already helping with reducing the income information.
- Proof of Real Estate Owned – most of the Investor Loans that do not require income or job history want to confirm that you have experience owning another investment property. The easiest way to prove this is on your tax return, but we don’t want to open that can of worms!
- Leases
- Verification of Rent – Lenders will see this on your credit report if you have owned a home before. If the mortgage is still open and on your credit report, you will not need a rent verification, but if you have not owned a home yet, proof of rent is non-negotiable. Lenders will want to see how much your payment is changing and if you have been able to manage your housing payment as you build your business.
Tips for preparing your finances before applying for a no-document loan
Securing a no-document loan can be tricky, but with some preparation, your income verification loan is practically in the bag. Firstly, don’t make the mistake of shredding record-keeping documents such as bank statements or income records – even if you save them digitally, it will be beneficial to keep physical copies for reference when needed. Additionally, take your time investigating the financial documents you must present to the lender to prove income and financial stability.
A good accountant can be a significant help or hindrance here – they can advise on which documents are best to showcase and how much income is required to get the desired outcome. They can provide explanations and breakdowns to improve your chances of getting approved. The same applies if your accountant will not cooperate with the lender. If they choose to plead the 5th during your mortgage loan process, I would advise you to start looking for a new CPA.
Finally, having an established credit score and history will always hold you in higher regard with lenders, so prove yourself by clearing existing debts on time and always remember that your credit score matters. The stronger your credit score, the less down payment will be required with these loan types, which already will have a higher down payment requirement.
Things to consider before taking out a no-document loan
Before taking out a no-document loan, it’s important to consider the type of loan you need and the different loan programs available. It is also essential to understand the terms, such as the loan’s down payment and amortization structure. Depending on your type of loan, you may have different options for setting up this type of loan program, from balloon payments to a fixed amortization period. Furthermore, carefully review any extra fees associated with the loan, such as origination or closing costs, that may occur with certain types of loans. By analyzing different aspects of the no document loan, you can ensure you choose the suitable loan program that best suits your purpose and financial situation.
Get a non-QM mortgage with Co/LAB Lending
Don’t let your self-employed status stop you from buying a home. Don’t file your next tax return reporting more income than you need to, and pay Uncle Sam more than he deserves. We can help you find the right no document loan for you.
