Low Doc Loans Then And Now
Loans that don’t require piles of documentation were criticized following the 2008 financial crisis - but they have changed dramatically since.
Some lenders engaged in extremely risky lending behavior in the years leading up to the last crisis.
NINJA loans (No Income, Job, or Assets required) became a byword for reckless lending.
Today the situation has changed significantly.
New regulations that control what type of loans banks and other lenders can offer have been in place for almost a decade.
The Truth In Lending Act and the Dodd-Frank Act placed limitations on the type of loans that lenders can offer to borrowers who don’t satisfy the usual criteria.
However, amendments in 2018 have opened a new niche for low or no document loans.
If you’re self-employed or earn your money online, you may be the ideal candidate for a low doc loan.
Reasons You Would Need A Low Doc Loan
There are certain specific situations that make a loan which requires less paperwork the best option for borrowers.
Here are some of the reasons why you may want to opt for this type of loan.
- You’re Self-Employed - People who work for themselves often aim to report lower earnings for taxation purposes. This can be advantageous - but it also makes your income look lower than it really is. A low doc loan provider will look beyond basic documents like your W2 and assess your actual income and assets.
- You’re Under 30 - Younger people who haven’t built up a long career and banking history may be at a disadvantage when it comes to traditional loans. A loan that doesn’t require too many documents may therefore be ideal.
- You’re Retired - Retirees may not have a large income on paper but their assets and credit score often make up for it.
- You Have Privacy Concerns - If you don’t feel comfortable sharing details about your income with a lender, you’ll appreciate the application process that limited documentation loans offer.
If you feel that you’d benefit from a less paperwork-intensive loan, here’s what you need to know.
How Low Doc Loans Work
Before you apply for a low doc loan it’s important to know what this type of lender looks for in a borrower.
- Since you don’t have to prove income, you’ll need to have excellent credit (FICO 720 or better) and substantial assets to increase likelihood of approval.
- Assets could be in the form of equities, retirement annuities, or real estate - but cash in the bank is always the most attractive asset.
- If you’re willing to advocate for yourself and make a strong case for why you need the loan, you’ll increase your chances of approval.
Costs Associated With Low Doc Loans
There’s no denying that low doc loans are riskier for lenders.
This can result in higher costs for you as a borrower, including:
- Higher APRs - You should expect to pay at least 1% more on your home loan with a low doc lender.
- Upfront Fees - It’s not unusual for initial fees on a low doc loan to exceed $1000. Make sure you calculate the added fees before you apply.
- A Significantly Bigger Deposit - You may need to pay a down payment of 40% on a property you’re planning to finance using a low doc loan. This is almost double the 20% that’s usually required for a regular mortgage.
The added costs of this loan type may be worthwhile for some borrowers but not for others.
Weigh up the pros and cons to help you decide if this option is right.
Low Doc loans – Are They Worth it?
Mortgage applicants who have been turned down because their stated income was considered too low have reason to be frustrated.
- If you’ve found yourself in this situation recently a low doc loan could be the solution.
- Not having to provide comprehensive proof of income can be a major advantage if you’re self-employed, retired, or derive your income from a non-traditional source.
- The extra fees and higher APR may not be ideal, but that may be the price to qualify for a mortgage if you have unique financial circumstances.
- A low doc home loan isn’t most people’s first choice. If you apply successfully for a mortgage with a lower APR and down payment, you’ll probably want to take that option.
- If your main reason for choosing this loan type is that you earn a conventional income but simply haven’t gathered the necessary documents, rethink your strategy. The time it takes to obtain proof of income will be well-spent if it secures a more affordable home loan.
The decision to apply for a low doc loan depends entirely on your income situation, your credit score, and your assets.
Borrowers who earn their money in unique ways shouldn’t be denied the chance to own real estate.
A low doc loan could be a very attractive option for you if you fall into this category of borrowers.
Your credit score should be above FICO 700 if you plan to apply for this kind of loan.
Having sufficient assets and being willing to offer a 40% down payment will also boost your chances of approval.