No Documentation Mortgage Loans

The housing market was on fire in the early 2000s before it eventually burnt to a crisp. This led to rampant speculation and greed as a larger group of prospective home buyers emerged.

Unfortunately, because home prices had increased so significantly, many would-be borrowers were forced to go “No Doc” in order to actually qualify for a mortgage. Whether that’s really qualifying is a question for another day, or perhaps just too enigmatic.

What Are NINJA Loans?

• A NINJA loan is ironically named
• Seeing that it requires
• Very little of the borrower

Anyway, 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.

It doesn’t mean the borrower doesn’t have a job, it just means the lender doesn’t ask any questions related to their employment. So in essence, the borrower could potentially be unemployed. And that might explain a lot of the trouble these loans eventually caused.

Essentially, all the borrower must document with a no-doc loan 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. Sound scary? It is/was.

Most Mortgages Were No Doc Prior to the Crisis

• Before the housing crisis in the early 2000s
• It was pretty common just to go stated doc or no doc
• Because it was far less hassle
• And the associated pricing hit wasn’t too significant
• Many borrowers were also in over their heads so it was a necessity to qualify

If you’re wondering whether this type of mortgage 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.

While I don’t know the exact number, I wouldn’t be surprised if no-doc loans held a majority for some time in 2005-2008. Basically everyone just went no-doc to avoid the trouble, even if they could verify income, assets, etc.

Prior to the crisis, there were a large number of Alt-A lenders and subprime banks that offered “No Doc” mortgages, but pretty much all of them shut down as a result of the downturn.

No-Doc Loans Are More Expensive Because They’re Riskier

• No doc loans are more expensive
• Than fully underwritten home loans
• Because the unknowns = more risk
• Which makes the underlying mortgages worth less to investors

While no-doc loans were readily available, the pricing adjustments were often 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, you could tack on a second mortgage from a different lender as well and still get to 100% financing!

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.

Still Looking for a No-Doc Loan Today? Good Luck

• Post-crisis no doc loans were pretty much non-existent
• But they’re slowing creeping back into the market
• Today’s iteration are known as Non-QM loans
• Because they don’t meet the Qualified Mortgage rule
• And they’re harder to qualify for compared to the old ones

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 5%, the documentation hit alone will drive your interest rate up to 7%. Then there are other adjustments to worry about as well.

A Quick Example of No Doc Loan Pricing:

Par rate (before any pricing adjustments): 5%

Interest rate adjustments:

– 2% for “no doc”
– 0.5% for 680 FICO score
– 0.25% for cash-out
– 0.25% interest-only

Your final interest rate would be 8% 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. And ideally you can refinance a short time later to receive more favorable terms.

This is all the more reason to properly prepare yourself for a mortgage by keeping your credit scores in good shape, setting aside assets, and maintaining steady employment 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. They are becoming a lot more common again and could still suit your needs.