| A
mortgage Tony Soprano would love: The no-doc | | |
| Stated-income
mortgages
Someone who gets a stated-income mortgage must disclose annual
earnings, usually for the last two years and sometimes more. Instead of backing
up the income statement with pay stubs and W-2 forms, the borrower might have
to show tax returns, bank statements and even profit-and-loss statements.
The borrower must list assets and debts. That's why
the term "low documentation" isn't always accurate. Stated-income
mortgages are for people who make the money they say they make, but that amount
doesn't show up on the bottom line of their income taxes, says Hugh McLaughlin,
president and CEO of KMC Mortgage Services Inc., a lender and broker in Naples,
Fla. "They work for cash; they might be cleaning people
or people who work in restaurants," McLaughlin says. "It is also good
for self-employed borrowers who actually make gross sufficient amounts of income,
but they write off a lot on their taxes. They have the capacity to pay the loan
back, but what they file with the IRS doesn't reflect their real income." The
borrower has to list debts because the lender wants to determine the debt-to-income
ratio. That's the percentage of gross income that is used to pay off debt. Lenders
look at two ratios: the percentage of income that goes toward the mortgage payment,
and the percentage that goes for all debt, including mortgage, credit cards, auto
loans and other loans. A rule of thumb states that the interest
rate on a stated-income mortgage is about a half-point above the comparable rate
for a conventional mortgage. Like all rules of thumb, that's sometimes accurate
and often isn't. A borrower's interest rate depends on a lot
of things: income stability, debt-to-income ratio, credit score, size of the down
payment and appraised value of the property. Depending on those variables, a borrower
with a stated-income mortgage could expect to pay anywhere from one-eighth of
a percentage point above the conventional rate to more than 1 percentage point
above. This might be the right mortgage for Hank Hill, who
earns commissions by selling propane and propane products on "King of the
Hill," or for the cash-earning Spike in "Buffy." No-ratio
mortgages
With these mortgages, the borrower doesn't declare income.
No pay stubs, no W-2s, no tax returns. Think of it as the "don't ask, don't
tell" mortgage: The lender doesn't ask how much the borrower earns, and the
borrower doesn't tell. These are called no-ratio mortgages
because the lender doesn't compute the debt-to-income ratio. The lender can't
compute it because the lender doesn't know the borrower's income. Sometimes the
borrower doesn't supply a list of debts, either. But the borrower
does list assets -- money in the bank, stocks and bonds, real estate, ownership
stakes in businesses. "The purpose of the no-ratio program
is to provide expedited processing for creditworthy borrowers," Pawsat says.
"It's not intended as a means to qualify marginal borrowers." Someone
who owns 10 car dealerships might apply for a no-ratio mortgage because a conventional
loan could require submitting personal and corporate tax returns and a year-to-date
profit-and-loss statement for all the dealerships. "It might cost him more
to assemble that from his accountant than it would cost in rate," Pawsat
says. | 
