As the housing market continued to heat up in the 2000s, a larger group of prospective home buyers emerged. Unfortunately, because home prices increased so significantly, many would-be borrowers had to go “No Doc” in order to actually qualify for a mortgage.
The term “No Doc” is usually defined as no income, no asset, and no employment verification. Some silly loan officers refer to these types of loans as NINJA loans, with the “J” representing the word job.
Essentially, all the borrower must document is their credit history (in the form of a credit report), and the bank or lender will use this alone to determine if they are suitable for home loan financing. If you’re wondering whether this type of lending is risky or not, look no further than the recent mortgage crisis that ensued around 2008.
Tons of mortgages leading up to the crisis were no documentation loans, and as long as the borrower had semi-decent credit, they could generally qualify for a loan, even a jumbo loan! Yikes.
Prior to the crisis, there were a large number of Alt-A lenders and subprime banks that offered “No Doc” mortgages, but often the pricing adjustments were enormous, and the loan-to-value (LTV) and combined-loan-to-value (CLTV) restrictions typically limited the amount of financing a borrower could obtain.
Most banks and lenders only offered financing up to a CLTV of 80% if you could only provide “No Doc” documentation. However, if you were refinancing and had enough equity in your home, you may have been able to take out a mortgage using a no documentation loan while avoiding any associated pricing adjustment.
Typically, this threshold was set around 65% loan-to-value (LTV). The thinking here was that a borrower with that much home equity wasn’t a threat to the bank, even if they couldn’t keep up with mortgage payments. After all, if the bank had to foreclose, they could still sell the home for a profit.
These days, you’ll be hard pressed to find a no documentation loan, but if you do, it will likely call for a high FICO score, typically above 700. After all, if the lender only has credit to go on, they need to ensure you’re not a huge credit risk. Remember, they won’t know anything else about you, so lending to a relative unknown with bad credit wouldn’t make much sense.
And keep in mind that the pricing adjustments for “No Doc” will be extremely high if the loan-to-value is 80%, often about two points to the rate, so if the lender offers a par rate of 6%, the documentation hit alone will drive your interest rate up to 8%. Then there are other adjustments to worry about as well.
Let’s look at a quick example of a No Doc loan:
Par rate: 6%
Your final interest rate would be 9% for your “No Doc” mortgage. Ouch!
The question you need to ask yourself is if it is worth getting that mortgage if you can only go “No Doc.” It may be advisable to hold off until you can provide a better level of documentation to open up your loan program options and keep your mortgage rate at a reasonable level.
Of course, if you really need to purchase a home, or are in dire need of a refinance, a no doc loan may be your only option. This is all the more reason to properly prepare yourself for a mortgage by keeping your credit score in good shape, setting aside assets, and maintaining a steady job history.
Tip: You may also want to consider a stated income loan, which come with far smaller pricing adjustments, yet increased flexibility in terms of qualification.