Applying for a mortgage involves a small mountain of paperwork, including bank and tax statements, pay stubs and more. These documents help answer many of the questions a mortgage lender will ask in order to qualify you for a loan.
If your income is irregular, though, or you lack some of the standard evidence of a typical full-time employee, you might not be able to provide answers to all of those questions. In this case, you could be a candidate for a no doc or no-income verification mortgage.
What is a no-income verification mortgage?
A no doc mortgage is often referred to as a no-income verification mortgage. As the name implies, this type of loan does not require a lender to verify how much you earn. These are also sometimes called NINJA mortgages, which stands for no income, no job or assets.
“It’s an option that has existed for decades,” explains Greg McBride, CFA, Bankrate chief financial analyst. “During the housing boom, though, this previously niche product came into contact with mainstream borrowers. That was a breeding ground for the problems that led to the housing bust.”
In the years leading to the financial crisis, no doc mortgages tended to be offered by subprime lenders, not major financial institutions, McBride says. However, due to the complexities of the finance industry, even the biggest banks wound up with exposure to the risk of failing to verify a borrower’s ability to repay a loan.
Since then, “no doc mortgages have gone back to being niche products,” McBride says. “They’re probably even more niche than they were before.”
How do no doc mortgages work?
Historically, no doc mortgages operated on a bit of an honor system: The borrower would state their income without providing a load of paperwork to back up their claim. The lender still reviewed their credit history, but they took the borrower at their word on how much they earned.
The government has since addressed that with what’s called the ability-to-repay rule. In short, under this rule, a lender must figure out if you can actually pay back a mortgage.
“You generally cannot rely on what consumers orally tell you about their income,” the Consumer Financial Protection Bureau (CFPB) explains in its handbook for mortgage lenders. “You must verify a consumer’s income using documents such as W-2s or payroll statements.”
However, the CFPB offers flexibility for documenting how a borrower can repay. For example, a lender could use financial institution records that highlight the borrower’s assets to help process a loan.
When would you need a no doc mortgage?
A no doc mortgage might be in the cards if you do not receive regular paychecks but you do have plenty of money or assets. This product only applies to a select few, though.
“These are not something available for your typical middle class or upper-middle class borrower,” McBride says. “It’s an offering for a high-net worth individual with rather unique circumstances, such as an entrepreneur who runs a successful start-up and has plenty of equity in the company.”
No doc mortgages vs. other loans
A no doc mortgage has the same benefit of other types of home loans: It helps you borrow the money you need to acquire a property.
However, the terms and credit requirements needed to get approved for a no doc mortgage are different. Simply put, no doc loans require higher credit scores and larger down payments.
They also tend to charge higher interest rates. Why? Because not having full concrete evidence of income carries a higher risk of default.
|Conventional loan||FHA loan||No doc loan|
|*Current interest rate according to Bankrate|
|3% down payment||3.5% down payment||30% or more down payment|
|620 credit minimum||580 credit minimum||700+ credit minimum|
|3.680%* average interest rate||3.160%* average interest rate||Varies, but expect to pay several percentage points higher than conventional loans|
Can you get a no doc mortgage today?
While no-income verification loans do not exist in the same form as prior to the Great Recession, there are some no doc mortgages available, and they are part of a larger bucket of non-qualified mortgages. You will not find these products widely advertised. In fact, all of the major banks contacted for this article indicated they do not offer this type of loan. You’re more likely to find them through a portfolio lender, and in some cases they might be referred to as a bank statement loan.
If you’re someone who is worried about proving your income due to your status as a self-employed individual or working for tips, there are other routes to qualifying for a conventional loan. It won’t be a no-doc situation, though; you’ll need to hand over quite a few documents to get a mortgage if you’re self-employed.
“In the absence of regular paychecks,” McBride says, “a proven income stream via tax returns is the way that many self-employed individuals and business owners qualify for mortgages.”
There’s just one catch: Those tax returns need to provide compelling evidence — a challenge if you’re focused on maximizing deductions.
“The problem is that some business owners run those businesses at a loss,” McBride says. “If it’s a loss for tax purposes, it’s a loss for loan qualification purposes, too.”