Some lenders are still making no-doc mortgages. However, credit expectations are significantly higher now and the loans are more expensive for consumers to get. Borrowers may need “very good” or “excellent” credit now instead of “fair” credit, and no-doc loans can come with a higher interest rate than a traditional home loan. Still, these loans are essential for borrowers with high but irregular incomes since even those who work on commission or the self-employed need to be able to borrow money for a home.
A lot of people have a low taxable income, too. It may be obvious from your bank statements that you generate a lot of cash, but that doesn’t mean it is reflected as a high income on your taxes. If a lender is just looking at the bottom line on your 1040s, it may not account for your actual cash flow after tax adjustments like depreciation and carried-over losses from previous years.
In addition, no-doc loans are still available for business purposes since commercial and business loans weren’t impacted by the post-housing crisis regulations.
Self-employed and no income verification mortgages
Fortunately, there are still ways to get a mortgage if you’re self-employed or have a fluctuating or hard-to-prove income.
Self-employed borrowers are certainly eligible for full document loans but they also have the option of bank statement loan programs not available to W-2 wage earners.
With this type of loan, self-employed borrowers may be able to use 24 months of bank statements to demonstrate a specific pattern of cash flow that meets the Ability-to-Repay requirement. In this case, you may need to provide additional documentation on top of your bank statements, such as proof of your other debts. You may also need to save up at least 20% of your home’s purchase price to qualify. However, there are a variety of formulas used by lenders to determine which type of documentation is required and other lending criteria.
Many self-employed borrowers have the ability to repay, but they are unable to demonstrate that with traditional use of tax returns due to extensive write-offs. A bank statement loan program can help them prove cash flow and income regardless of what their tax returns say.
There are some criteria that can help the self-employed or commission-based workers secure a mortgage, whether they opt to go with a traditional lender or pursue a no-doc loan.
Tips include:
- Save up a big down payment. You want to save up a big chunk of money to put down on your home — hopefully at least 20%. The bigger your down payment, the more likely you are to qualify for a home loan.
- Make sure your credit score is as high as it can be. You’ll need very good credit to improve your chances of getting a home loan with the best terms. Typically, “very good” credit includes any FICO score of 740 or higher. If your credit score is lagging, you should take steps to improve it such as paying down debt to lower your credit utilization and making sure all your bills are paid on time.
- Pay down debt to improve your debt-to-income ratio. Most mortgage lenders limit qualified mortgages to borrowers with a debt-to-income ratio below 43%. This means that all your debts including your housing costs must make up less than 43% of your gross income each month. If you earn $5,000 per month, for example, your monthly debts including your house payment should be less than $2,150.
- Get your tax returns together. It’s pretty standard for lenders to ask for two years of tax returns during the loan application process. However, you may not need two years of tax returns if you opt for a bank statement loan program.
Final thoughts
No-doc mortgages may not be as prevalent as they once were, but you can still get a home loan if you’re self-employed or have a highly variable income. You’ll have to jump through more hoops to qualify, but you are protected from some of the predatory lending practices that were commonplace until the financial crisis.
Ultimately, changes made in the realm of mortgage lending such as the Dodd-Frank Ability-to-Repay rule were necessary to not only protect investors, but also borrowers. With stricter requirements in place, homebuyers are much less likely to end up in a home they can’t afford — although that often means borrowing less than they want.
Refinancing or Buying-
Home Financing doesn’t have to be Stressful.
We monitor real time interest rates, so our clients are able to access some of the lowest rates available.
With rates still historically low, poised to move higher, many would be home buyers are moving quickly to finance their piece of the American Dream.
Existing home owners have refinanced at least once, even twice. But there are still many who have not, due to either not wanting to deal with the stress of gathering documents and not sure of qualifying for a loan.
At North Atlantic you receive attentive personalized service
(see what our clients say).
Believe me it’s a great deal easier with our help and expertise. The average time to close a loan is about 30 days. We understand the guidelines and know what different lenders can do, which increases your opportunities for a fast easy loan with a great rate.
Don’t put it off any longer and start saving with a lower mortgage payment.
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