No-documentation loan

What is a no-documentation loan?

When a person applies for a mortgage, the lender will want to see certain documents, including verification of income through bank statements, tax returns or pay stubs. With a no-documentation loan, lenders don’t require them.

These loans also were called SISA loans for “stated income, stated assets,” NINA loans for “no income, no assets” and NINJA loans for “no income, job or assets.”

Today, no-documentation loans are illegal.

Deeper definition

When lenders were underwriting a no-documentation loan, they allowed borrowers to simply state their income rather than depending on verification through personal financial documents.

This was particularly helpful if the borrower was self-employed. The lender would review the borrower’s credit report and would accept the borrower’s income as the borrower submitted it. In most cases, the borrower’s credit score would have to be above 740 before he or she could get a no-documentation loan.

To be sure, lenders typically charged higher interest rates for no-documentation loans. In addition to paying a premium for the mortgage, the borrower also would be expected to pay additional points to obtain the loan.

While lenders offering the typical mortgage will allow a borrower to finance up to 90 percent of his or her mortgage, lenders of a no-documentation loan would allow the borrower to finance 80 percent, and sometimes less.

During the foreclosure crisis of 2008, lenders increasingly moved into murky territory when it came to these types of loans, agreeing to subprime loans with high rates and fees and no down payment requirement or no-doc loans without income verification.

Now, they are illegal because they violate the requirement that lenders must verify the ability of the borrower to repay the mortgage before approving a loan.

No-documentation loan example

Back when no-documentation loans were still on the market, Ernie, a self-employed contractor, applied for one. He was offered an interest rate of 7.5 percent, 2 percent higher than the going rate.

With a $200,000 purchase price for the home, Ernie was asked to put down at least $40,000. With a 30-year term, his monthly payment would have been $1.064.48, excluding taxes and homeowners insurance.

When you consider buying a home, use our mortgage calculator to determine your monthly payment.

 

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