No Documentation Loans
It seems a large number of homeowners these days are looking to finance a mortgage, but many borrowers have to go “No Doc” in order to qualify. “No Doc” is usually defined as no income, no asset, and no employment verification. Some refer to these types of loans as NINJA loans, the “j” representing the word job. Essentially all the borrower must document is a credit report, and the bank or lender will use this alone to determine if the they are suitable for financing.
There are a number of Alt-A lenders and banks that offer “No Doc” mortgages, but often the pricing adjustments are enormous, and the CLTV, or combined-loan-to-value restrictions typically limit the amount of financing a borrower can obtain.
Most banks and lenders only offer financing up to a CLTV of 80% if you can only provide “No Doc” documentation. However, if you have enough equity in your home, you may be able to take out a mortgage using a no documentation loan while avoiding any associated pricing adjustment. Typically this threshold lies at about 65 percent loan-to-value.
If you do find a no documentation loan, 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 that you’re not a huge credit risk. Remember, they don’t know anything else about you, so lending to a relative unknown with bad credit wouldn’t make a lot of sense.
Keep in mind that the pricing adjustment for “No Doc” will be high if the loan-to-value is 80 percent, often about 2 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%.
Let’s look at a quick example:
6% par rate
Adjustments to rate:
2% for “no doc”
0.5% for Fico
0.25% for cash-out
0.25% interest-only
Your final interest rate would be 9% for your “No Doc” mortgage.
The question you need to ask yourself is if it is worth getting that mortgage if you’re unable to provide better documentation than “No Doc”. You may want to hold off until you can provide a better level of documentation to open up your program options and keep your interest rate reasonable. Or consider a stated income loan, which has less substantial pricing adjustments.
