Are there no Doc mortgages yet?

By on April 19, 2021 0

Just ten years ago, millions of Americans took full advantage of doc-less mortgages. Unfortunately, the defect rate of these potentially dangerous products has almost brought down the American real estate market.

As a result, go ten years ahead and most lenders have gone from “no doc” to “all doc, all the time”.

Fortunately, as the lending landscape continues to loosen its grip, new alternatives for homeowners non-traditional financing needs arose.

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What is a loan without doc?

Pre-housing crisis, many lenders offered doc-free loans to consumers who really had no way of paying them back.

These popular mortgages were named based on their lack of required documentation. The loans required very few “documents”.

The most infamous of the no doc loans was the NINJA loan with no income, job or asset verification.

The borrower had to indicate what his Income was, but no one at the lender verified that this information was correct.

Unlike traditional mortgage programs, these loans were not based on a homeowner’s employment and income. They were based only on credit history and sometimes on assets.

How other things became “income” (hint: they didn’t)

The original idea behind no doc loans was to buy a house easier for business owners. Many had plenty of cash, but their taxable income, used by most lenders to qualify for a mortgage, was not enough for the loans they wanted.

Typical “no doc” or “reported income” or “no income verification” loan guidelines included requirements that applicants must have at least six months of their reported income in reserve. It is a form of savings. So “savings” replaced “income”.

Most of the loans also had fairly high minimum credit scores. The reasoning for this is that if you are clearly spending money and have no problem paying bills on time, then you must have income. Thus, the FICO score became “income”.

Of course, people can borrow money to top up a reserve account, pay their bills by borrowing more, and have perfect credit without having the means to buy an expensive house.

No doc left behind

As the popularity of these loans increased, lenders and homeowners began to push the limits without doc loans. And they scrapped many of their safety nets like larger down payments, higher minimum credit scores and increased reserves.

Subprime loans with high rates, high fees, no down payment requirement and no income verification have taken over the market.

Eventually, as a result of the abuse of these “lying loans”, these delinquent loans practically disappeared.

This has left a lot of scramble for new loans that serve the original purpose of undocumented and undocumented mortgages, without the potential for abuse created by NINJAs.

Repayment capacity and the QM rule

To turn the market around, the Consumer Finance Protection Bureau (CFPB) has introduced some new rules for mortgage lenders.

The Consumer Financial Protection Bureau amended Regulation Z, which implements Truth About Lending (TILA). Regulation Z has been amended to add the repayment capacity (ATR) to reign.

Generally, the ATR rule states that lenders must make a good faith and reasonable determination of a homeowner’s ability to pay off their new mortgage.

One way for lenders to follow the ability to repay rule is to make a “qualifying mortgage” (QM).

A qualifying mortgage is a category of loans that have more stable and secure characteristics, which increase the likelihood that you can afford your loan.

Non-senior loans enter the market

Because of the negative connotation associated with them, you rarely hear lenders say the word “subprime”.

The word “subprime” can be a bad word for many people. It points to tough times in the mortgage and real estate industry – a time linked to the 2008 recession.

Non-prime has now replaced the subprime. This is a term for mortgage products that do not meet the constraints of government lending standards or qualified mortgages.

Those who cannot qualify for traditional financing may find that non-senior loans are the perfect substitute.

Bank statement programs

For freelancers or independent contractors around the world, the bank statement loan is an ideal loan product.

Bank statement programs are specially designed for the self-employed and others whose tax returns and employment history may not show all the income they have.

On paper, these mortgage applicants may seem riskier than they actually are because they fail to meet quality management standards.

the bank statement program is designed to mitigate this shortfall, determining a claimant’s repayment capacity on the basis of a more practical, case-by-case approach.

Instead of requiring years of tax documents, W-2s, and paycheck stubs, lenders base their approvals on a combination of bank statements and a profit and loss account for your business.

Bank statement programs typically calculate income from 12 to 24 months of personal bank statement deposits.

Additionally, some lenders allow you to include commercial bank statements.

Cash flow products for investors

Investment properties, also known as unoccupied properties, can offer profitable investment opportunities for the occasional owner, as well as seasoned real estate investors.

What reality TV doesn’t show you, however, is that getting the best possible financing deal for investment property isn’t always easy.

With the Investor Cash Flow Program, no personal income is used to qualify. Lenders base their qualification solely on the cash flow generated by the property.

Unlike traditional financing, there are no restrictions on the debt ratio.

Hard money loan

“Hard money” is financing available from private companies or individuals to invest in real estate.

Real estate investors typically use hard money lenders when purchasing a property in need of work. This rehabilitation work may make it impossible to obtain traditional funding.

Hard money loans have several defining characteristics.

  • Hard money can be beneficial for short term loan situations
  • Lenders can assume that a foreclosure will occur and base their underwriting decisions on the value of the property.
  • Almost all hard money loans have terms ranging from 6 to 36 months.
  • Many hard money lenders do not require income verification.

Cautions Regarding the Non-Preferred Mortgage Program

In an era of mortgage lending filled with strict guidelines, unsecured loans can be a great alternative for those looking for a no-doc mortgage.

The only catch with these great doc-less mortgage substitutes is that they usually come with their own set of strict requirements.

You can find lenders with lower requirements, but most want a deposit by at least 20 percent.

Credit score requirements can range from excellent to as low as 500.

The interest rates for non-preferential loans are several percentage points higher than those for preferential loans.

Higher set-up costs and closing costs almost always accompany these programs.

What are the current mortgage rates?

Many of the nine million self-employed professionals in the United States who make a decent living do not meet lender income tax requirements.

Fortunately for many of these homeowners and others who do not fit the traditional financing model, many alternative financing options continue to emerge.

Check your new rate (May 24, 2021)

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