asset documentation Archives

You don’t need perfect credit or a W-2 to secure a mortgage. Alternative documentation loans allow some flexibility in qualifying for a mortgage.

Read on to see what options may be available to you.

What is an Alternative Documentation Loan?

The exact definition of an alternative documentation loan depends on the lender. There aren’t any regulations or requirements for this type of lender. It’s not your A-paper or subprime loans. It’s somewhere in between. It’s a straightforward loan with the same benefits as any other loan. The difference is in how you qualify for it.

The Characteristics of an Alt-A Loan

There are many different ways you can get an Alt-A loan. With any Alt-A loan, though, you don’t provide the same documentation as a full documentation loan. In a full doc loan, you would provide:

Pay stubs
W-2s
Tax returns
Bank statements
Employment verification

In an alternative documentation loan, you won’t provide all of that. You might provide some of it, though. It depends on the program.

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Instead, you’ll provide what they call “limited documentation.” Maybe you have a job that has variable income. You might qualify for the loan based on your assets alone. You’d be a good candidate for this limited documentation loan. Rather than providing W-2s and tax returns, you might just provide your bank statements.

Who Qualifies for an Alternative Documentation Loan?

Every lender has different requirements. There isn’t a blanket policy for every bank. One bank might require a credit score over 680. Another might allow scores as low as 620. It’s impossible to know unless you apply with various lenders.

The real question is who would benefit from this type of loan? Following are the most common borrowers:

Self-employed – These borrowers often have inconsistent income or claim a lot of expenses on their tax returns. Qualifying with full documentation probably wouldn’t occur. Even though the borrowers can afford the loan, it doesn’t look that way on paper.
Borrowers without a job – Some borrowers have enough assets to afford a mortgage, but don’t have employment. Without employment and a constant cash flow, it could be hard to secure a new mortgage. Alt-A mortgages can help work around this issue.
Borrowers with less than perfect credit –Credit history issues might prevent standard lenders from approving your loan. This might make the Alt-A loan a good solution for you. These lenders make up their own rules and can often work around issues as long as they aren’t housing related.
Borrowers that need a high LTV – The more you borrow, the riskier you become. FHA loans do allow LTVS up to 97.5%, but you still need straightforward income and decent credit. Combine either factor with a high LTV and you have a recipe for trouble. Alt-A loans can work around this issue.

Prepare Yourself for Higher Rates

Don’t be alarmed if you pay a higher interest rate for an alternative documentation loan. It’s the tradeoff for more flexible requirements. If you want a lender that requires perfect credit and straightforward income, you can have the low rates. If you need concessions, the lender is going to charge you for it.

This isn’t to say you’ll pay excessive interest rates. It depends on the situation. As with any other loan, shop around! Don’t settle for the first approval you receive. Make sure you comparison shop. This is especially important because you have a unique loan type. You aren’t looking for a Fannie Mae or FHA loan. Each lender will have their own program.

If you think you don’t fall under the “a paper” loans, consider alternative documentation loans. More and more lenders offer them today. As the number of self-employed borrowers increases, the need for this type of lending increases.

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Bank Statements and the Mortgage Process

When making loans, lenders must ensure that the borrower has the capacity to pay the debt to be incurred. They would look into the income of the borrower to make this determination.

Moreover, lenders need to check if the borrower has enough assets (readily convertible to cash) that can cover the down payment, closing costs, and reserve requirements.

Bank statements can cover both for the lenders in their quest to track the assets and income of the borrower. They are also helpful in verifying the identity of the borrower and the information as it pertains to asset accounts set forth on his/her mortgage application.

Usually, lenders look at deposits that fall outside of the declared income source of the borrower, e.g. an unexplained large deposit used for down payment. Or it could be recurring withdrawals that pertain to an undeclared debt obligation.

Mortgage borrowers like you can present your personal bank statements. If you are self-employed or are a majority owner of a business, both personal and business bank statements may be required.

Bank Statement Loans

These loans perfectly sum up the role of bank statements when applying for mortgages.

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Niche lenders who make these mortgages usually require personal/business bank statements for 12 consecutive months, thus dubbed as 12-month bank statement loans.

These lenders recognize the struggle of self-employed borrowers to have their real income verified because of write-offs on their federal tax returns. Interestingly, some bank statement loans don’t require tax returns and their related tax transcripts.

What’s important for the lenders is a reliable, steady cash flow that they will use to calculate income. To arrive at income, lenders take the average deposits during the given period, net of debits and withdrawals.

They will then take into account recurring monthly expenses to get average monthly income. From the average monthly income and recurring monthly expenses, they can come up with the debt-to-income ratio of the borrower.

Indeed, good credit, liquid reserves, and provable income via bank statements are the main ingredients to a successful bank statement loan.

As with any other loan, expect to meet loan-to-value ratios, down payment requirements and asset reserves as well.

Don’t estimate the power of bank statements especially if you have difficulty getting financing under standard mortgage programs. You can always look at alternative or nontraditional loan products like bank statement loans.

Happy shopping!