Getting a mortgage takes a lot of paperwork. You need to document your income by providing payroll, W2 forms, tax returns, statements from different accounts and more.
When your borrower or mortgage broker sings for documentation, that’s a good sign – they’re trying to get the best mortgage you can qualify for.
However, some people cannot submit the required documents. For them, borrowing is low documentation (or non-documentation), and some are still available.
Reasons for Low Documentation Credits
There are several reasons why you may not (or want) to provide information to a lender. For example:
- Self-employed people prefer to show lower income for tax purposes, but this makes it more difficult when seeking a loan
- Young workers have a history of low pay or no history
- New business owners can’t show past consistent earnings (several years required)
- Pensioners with investment income
- Privacy needs dictate that you maintain a level of income for yourself
- Finding and organizing documentation is too difficult
- Your income or assets are not documented in any way acceptable to the lender
Qualification without documentation
The good old days of easy qualification are over. Prior to the financial crisis that peaked in 2008, you can simply tell your mortgage broker how much you earn and little if any proof is needed. These “disbursed income” (also known as “fake loans”) are no longer free.
The Good Finance Investment Corporation (GFIC) now requires lenders to ensure that you have the ability to repay approved loans – if the mortgage is a “qualified” loan. Some lenders are willing to work in an unqualified mortgage space.
Please note that these lenders do not want to return in 2006 – they are not interested in issuing subprime loans using incorrect numbers.
However, they are interested in working with people who have the ability to repay (although they do not have the ability to document their income and assets in traditional formats).
To qualify for these loans, you must be an attractive lender, and the features below will help.
Good (or great) credit: Again, low-documented loans are a thing of the past. Borrowers are only ready to settle for less information if you have great vouchers (above 720 is a good place to start). That said, if everything else is in good shape, a few dings on your credit reports may not ruin the deal.
Revenue: Revenue always helps to get approved for a loan. But unqualified lenders may be more lenient in estimating income. If you can make a case (though you can’t produce W2), you might get approved.
Assets: There is a lot of money to help, it also helps your case. Large bank and investment accounts can serve as “reserves” that you can enter to continue making payments. Loans can be milder than income if you are strong on assets.
Capital: Lenders like to minimize the risks and see that you have skin in the game. If you make bigger participation, you have a better chance with low credit documents.
Better chance with low credit documents.
For conventional mortgages, 20% is sufficient, but 40% or more can be claimed from unqualified lenders. You can always put that equality in one day later.
No free lunch. Because you do not demonstrate your ability to repay using standard documents, lenders are at greater risk. These lenders also take the greater regulatory risk by working in gray (but still legal) areas. As a result, the price is higher.
Expect an interest rate that is at least one percent higher for low documented credit. Other processing fees may also be inflated.
If you’re just looking for an easier way to apply for a loan, this might not be the best option (dig out old tax returns and payment cards). But if you fall into the above categories, this might be your only option and still worth the price.