Are you looking for the traditional no doc mortgage options that were available years ago? Unfortunately, they are gone by the wayside. The housing crisis put an end to the mortgage program as we know it.
Luckily, it’s been replaced by another similar program that goes by the same name. You’ll just have to provide more verification for the loan program. It’s a good option for the self-employed homebuyer whose taxable income is much lower than what they actually make.
Keep reading to see how the new no doc loans work today.
The Ability to Repay Rule Changed the No Doc Mortgage
There’s one reason you won’t be able to find the traditional no doc mortgage anymore – it’s the Ability to Repay Rule. This rule states that the lender must determine beyond a reasonable doubt that the borrower can repay the loan. Without verifying your income, there’s no way for the lender to make such a bold statement.
So where does that leave you? For starters, you will have to verify your income. But, it won’t be in the way that you think.
Your Bank Statements Tell a Story
Rather than providing a lender with your tax returns and allowing the lender to use your adjusted gross income plus any depreciation, you can provide your bank statements.
Just what do lenders look for on the bank statements? They look for income or deposits. They want to see consistent deposits either pertaining to the date or the amount. They will ask for at least 12 months of your bank statements to ensure consistency of the income.
The good news is that your bank statements likely show a much larger amount of income than your tax returns. This gives the lender a larger amount to work with, which hopefully means you have a lower debt ratio. Keep in mind, though, the lender will take an average. Some lenders require 12 months of bank statements while others prefer 24 months in order to get a true average of your income. Either way, they end up averaging your income. This accounts for the various cycles your business likely goes through in a year.
With the average income calculated, the lender can determine if you qualify for the loan based on your current liabilities and the amount of mortgage you are trying to obtain.
The Other Qualifying Factors
Before you get too excited, know that you’ll need some pretty hefty qualifying factors in order to qualify for this no doc mortgage, which many lenders call Alternative Documentation Loan.
For starters, you’ll need a good credit score. Just how good depends on the lender. On average, you can count on needing at least a 700 credit score to use this program, though. You’ll also need a decent size down payment. Again, the amount varies by lender. Count on needing at least 20% down, but many lenders may require more. The more you have invested in the home, the more likely you are to make your payments on time.
You’ll also need reserves available. Reserves are money you have in excess of what you use to make a down payment. The lender calculates your reserves based on the number of months of mortgage payments it covers. For example, $5,000 would cover 5 months of a $1,000 mortgage payment. The more reserves you have, the better your chances of approval.
You’ll also want to pay attention to your debt ratio. Most lenders won’t allow a DTI higher than 43%. This includes all debts, such as the new mortgage, your car payment, credit cards, and student loans. Some lenders may even require a lower DTI; it depends on their risk tolerance.
Last, most lenders will require third-party verification of your income. This could be something as simple as a letter from your CPA stating that you are self-employed. Some lenders also require a year-to-date Profit & Loss Statement to ensure that you are on target for the same amount of income this year.
As you can see the no doc mortgage isn’t the same as it was, but it’s still a good opportunity for the self-employed borrower to secure a mortgage. If you have good qualifying factors, you could be in good shape to find a loan with a lender. Remember, these loans are kept on each lender’s books; this means each lender will have different requirements. Shop around and find the deal that is the best for you.