Mortgage applications today mean supplying what feels like pounds of paperwork. The days of the low doc loan seem long gone. Just when you think you’re done, the underwriter asks for more. What if you don’t have the paperwork they need? Are you out of luck?
The good news is, you still have a chance at finding a mortgage. The bad news is it will require quite a bit of shopping around. You’ll need to find a lender willing to keep the loan on their books. A loan that doesn’t fully document their income the “right” way is a non-qualified loan. Not all lenders offer these programs because they can’t sell them on the secondary market.
That doesn’t mean there aren’t lenders out there. You just have to know what to look for and how to shop them.
Who Benefits from a Low Doc Loan?
First, let’s look at who could use a low doc loan. Generally, it’s the people who can’t fully document their income. This does not mean they can’t afford the loan. It means they can’t prove their income with paystubs or W-2s, the traditional way. Instead, they use things like bank statements or investment statements. These people may have a lot of money and can easily afford the loan. However, without those paystubs or tax returns, they can’t get a loan.
The most common people looking for this mortgage alternative are:
- People who work for themselves or a family member
- Borrowers with limited work history because they just started out or are at a new job
- Borrowers living on their investments or on retirement income
These people can’t verify their income the traditional way. But, what they can do is verify that they can afford the loan. This is a key factor for any loan. Whether a loan is qualified or not, lenders must make sure the loan meets the Ability-to-Repay Rule. Basically this means the lender made sure the borrower can afford the loan.
Don’t Shop for a Stated Loan – Look for Low Doc
If you haven’t shopped for a mortgage in a while, you might be used to shopping for a stated income loan. These loans don’t exist any longer. You have to verify your income in some manner. You can’t just state your income and let the lender give you a loan. That’s likely what led to the housing crisis. Lenders can’t do that anymore because of the Ability-to-Repay Rule. They must verify your income, even if it’s in an alternative way.
A low doc loan means the lender accepts alternative forms of income verification. Rather than paystubs, you might provide bank statements. In some cases, self-employed borrowers don’t want to supply their tax returns. They have too many expenses written off on them. Because lenders must use your bottom line income on your tax returns, this could hurt your chances of approval.
These borrowers are a great example of alternative documentation. They provide bank statements or Profit and Loss Statements rather than tax returns. Again, the lender can’t sell this type of loan to Fannie Mae or Freddie Mac. But, they can keep it on their books and service it themselves.
What Documents Will You Need?
Different lenders may require different documents. Don’t think it’s a one-size-fits-all approach. Ask each lender their specific requirements. In general, you can expect to supply some or all of the following:
- 12 months’ worth of bank statements – You’ll need to include all pages of each statement to allow the underwriter to look closely at your deposits and withdrawals
- Letter from your accountant proving your self-employment as well as how long you have been self-employed
- Investment account statements for the last 12 months if you use investment income to qualify
These documents are a general idea of what you may need. Again, each lender differs in their requirements. Some lenders take bank statements; others may still want to see your tax returns, even if they don’t use them for qualifying.
Increase Your Compensating Factors
The best way to ensure that you get approved for a low doc loan is to enhance your compensating factors. These are factors the lender doesn’t use for qualifying, but can use as a “back up.” In other words, they make your loan application look less risky. Here are a few good examples:
- High credit score – Each loan program has a minimum credit score they allow. But, if you have a score that far surpasses that minimum, it could boost your chances of approval. A high credit score usually means financial responsibility. That’s just what the lender wants to see.
- Excessive reserves – Your loan program may require a specific amount of assets on hand. If you have money beyond that amount, though, they can be your reserves. The lender counts reserves based on the number of mortgage payments the money can cover. If you have 6 – 12 months’ worth of reserves, you may increase your chances of approval.
- Low debt ratio – Each loan program will also have a maximum debt ratio requirement. If you have a DTI that isn’t even close to that amount, though, it can help. It shows lenders you aren’t in over your head in debt.
Shopping Around for a Low Doc Loan
Something to keep in mind, the low doc loan is a non-qualified loan. That means lenders aren’t restricted on what they charge. This doesn’t mean you pay through the nose in fees. But, you should shop around. We suggest getting quotes from at least three lenders. This way you know what the norm is for this loan type.
Don’t get caught up in comparing the interest rates alone, though. Look at the fees too. What does the lender charge? Are you paying origination fees? What about discount points? These factors should play a role in your decision.
If you plan to stay in the home for a long time, paying for the lower interest rate might make sense. Paying interest over 30 years can really add up, even if it’s only 0.5% higher. If, however, you know you’ll move in the near future, it might not be worth paying for a lower rate. You might be better off taking the lender with the higher interest rate up on his offer. You’ll pay the interest for a shorter amount of time, so paying slightly more won’t cost too much.
You’ll likely have an easy time finding a low doc loan when you prepare yourself. Make sure you shop around and find the best deal. But, the more organized you are, the more likely you are to get approved. Show lenders that you know what they expect and provide it to them. If you can supply them with compensating factors as well, it can increase your chances of approval.
Don’t forget to compare the interest rates and costs of each loan, though. Don’t jump at the first loan because you are excited to get approved. There are many lenders out there today that cater to the self-employed or non-traditional borrower. Find the one that meets your needs the most and secure the mortgage that will set you up for success.