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No-doc mortgages: How Tony Soprano, the Skipper and Thurston Howell III would borrow

Most house buyers work for a steady paycheck and are willing to divulge details of their finances in exchange for the best available mortgage loan.

But a lot of house buyers don't draw a steady paycheck from a boss. They own businesses, make commissions, live off investments, get their income in cash, or live a life of crime. Others don't want to give up their financial privacy. Limited-documentation mortgages are available for these people.

They're called "low-doc" and "no-doc" mortgages for the amount of documentation they require. The terminology isn't always accurate. Some low-doc mortgages require the borrower to give up lots of paperwork, such as tax returns and profit-and-loss statements. Even no-doc mortgages require at least a credit report and a property appraisal.

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Borrowers pay for the flexibility and privacy of these types of mortgages. They carry higher interest rates than conventional mortgages. Lenders want these borrowers to make substantial down payments and to have excellent credit.

Ethical mortgage brokers and lenders generally try to talk customers out of getting low-doc and no-doc loans because they cost more. Before applying for one, "talk to a qualified mortgage banker and give him all your information first," says Brian Pawsat of Prosperity Mortgage in suburban Washington, D.C. "Most people who ask for one don't need it. A good loan officer can help you work through and document what you think is undocumentable."

The Skipper, Mr. Howell and Ginger
There are three main types of low-doc/no-doc mortgages. To illustrate what sort of person would be right for these loans, we'll match each type of mortgage with characters from that microcosm of America, the old sitcom "Gilligan's Island."

  • Stated-income mortgages tend to be for people who work, but don't draw regular wages or salary from an employer. That includes self-employed people or those who make a living off commissions or tips.

    The "Gilligan's Island" character this type of mortgage might be appropriate for: The Skipper, because he owns a charter business.
  • No-ratio loans are often the right call for wealthy people with complex financial lives, retirees who live off investments, and people whose lives are in flux because of divorce, recent death of a spouse, or career change.

    The "Gilligan's Island" character this type of mortgage might be appropriate for: Thurston Howell III, because of the millionaire's complicated financial holdings (12 corporations, oil wells, and six acres of downtown Denver).
  • No-doc or NINA (no income/no asset verification) mortgages are for creditworthy people who want maximum privacy and can afford to pay for it.

    The "Gilligan's Island" character this type of mortgage might be appropriate for: Ginger, because she's a movie star who craves privacy as much as attention.

The Professor and Mary Ann would get regular, conventional mortgages supported by lots of documentation -- typically, a month of paycheck stubs, three months of bank statements, W-2s and complete income tax returns from the past two years, a list of all creditors, and possibly legal documents, such as divorce decrees and bankruptcy papers.

Gilligan would get a conventional mortgage, too -- if he could keep his paperwork safe from quakes, lost cosmonauts and hungry monkeys.

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."

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.

McLaughlin says this type of loan also can be for someone going through a big change, such as a divorce, death of a spouse, a career switch or retirement.

"There are those who basically retire, say, 'I cashed out of my business and got $3 million and I invested it and I'm going to make 10 percent.' That can't be documented," McLaughlin says. "That's a person who might get a no-doc loan until they get a track record of making money."

He says these also are for people "who say, 'I don't want to tell my whole life story to someone, so I want to pay a premium rate not to do that.'"

The rate for a no-ratio mortgage would start out at about a half-point above the rate for a conventional mortgage and might be up to 3 points higher, depending mostly on credit score, size of down payment and the property appraisal.

This type of mortgage might be just right for the Clampetts on "The Beverly Hillbillies."

No-income/no-asset verification mortgages
These loans, sometimes known as NINAs, need the least documentation. In some cases the borrower provides his or her name, Social Security number, the amount of the down payment and the address of the property being bought. That's it. The lender gets a credit report and a property appraisal.

The line gets fuzzy between no-ratio and NINA mortgages, McLaughlin says. A lot depends upon the borrower's credit score. The better the score, the less documentation the lender will demand. In many cases, the lender will want to know what the buyer does for a living, and for how long. Lenders feel more comfortable with a borrower who has been doing the same job for at least two years.

In any case, an excellent credit score is required. These mortgages are for people who never, ever fail to pay bills on time. Actually, they're for people who employ assistants to pay the bills on time.

They're meant for people who zealously guard their privacy -- the movie star who doesn't want someone in the loan office selling copies of her tax return to The National Enquirer, the mobster who doesn't want to leave a paper trail.

The less documentation, the higher the rate. Someone getting a no-documentation mortgage might pay up to 3 percentage points higher than the going rate for fully documented conventional mortgages.

"It's always a layered risk situation," McLaughlin says. The size of the down payment is one layer -- the bigger the down payment, the lower the risk and the lower the rate. The same goes for credit score, willingness to show ownership of assets, and the degree of openness about what the borrower does for a living.

A NINA mortgage might be right for the mysterious and unseen Charlie from "Charlie's Angels" and mobster Tony Soprano from "The Sopranos."

No one in his right mind would ask Tony Soprano too many questions, except his psychiatrist.

-- Posted: Feb. 14, 2002
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