Non- QM Loans: No-documentation Program Loans

How Does a No-documentation Program Loan Work?

Under a no-documentation loan, a borrower states what their income is. The lender doesn’t verify this statement but rather bases their approval on whether the borrower has a good credit rating, and whether the borrower has money to put down. Interest rates on no-documentation loans are much higher than average loans, with interest usually being charged per month rather than annually.

No-documentation loans cannot be used by owner-occupants; individuals who intend to reside on the property. They can only be used by investors, such as those who are interested in procuring a rental property, or who are purchasing a property to flip. The high-risk factor of a no-documentation loan means that it is too risky for a residential property.

Most no-documentation loans are going to be funded by private entities, or sometimes even individual investors. Since these companies set their own rates and terms, there’s a significant amount of variety within the market. Someone looking for a no-documentation loan should shop around.

Other than this, a no-documentation loan works very similarly to any other mortgage loan, except that they have faster repayment terms. Like other non-QM loans, a no-documentation loan cannot be sold to federal mortgage agencies, because they don’t meet federal standards. 

What’s the Difference Between a No-doc and a Low-Doc Loan?

In addition to no-doc loans, there are also low-doc loans, which share some similarities. With a low-doc loan, borrowers still do provide some evidence of their income, but this evidence may not be as stringent as a conventional loan. While a conventional loan might require tax returns, a low-doc loan will not. Borrowers who are recently unemployed (or were unemployed), who recently immigrated, or have been self-employed may not have the documentation necessary for a conventional loan. 

Low doc loans, unlike no-doc loans, can be used by residential home buyers. However, they generally need to have a very good credit score to qualify. This can be an option for those who do have income but have income from a non-traditional source, or those who are temporarily unable to verify their income even though their income will be stable in the future. 

What Are the Advantages and Drawbacks to a No-doc Loan?

A no-doc loan may be the only type of loan that someone can get if they aren’t able to reliably document their income. Investors and entrepreneurs who are over-leveraged on paper (with much of their cash non-liquid) may not qualify for traditional loans, even though they have a steady amount of income coming in. Thus, the major advantage of a no-doc loan is that there are situations in which it may be the only type of loan a borrower can qualify for. 

However, a no-doc loan does tend to be far more expensive than a traditional loan, and it also requires a significantly larger down payment. Since it can’t be used for residential, owner-occupied properties, it’s only useful for investors who have a clear business plan in mind for the property that they’re purchasing. These investors may be better served buying properties outright, if they can, due to the high-interest rates and short terms associated with no-doc loans.

No-doc loans used to be fairly easy to get; in fact, they used to be a walk-in/walk-out process. But because lending restrictions have tightened, no-doc loans do now require that the borrower have a very high credit score. It may not be feasible to get a no-doc or low doc loan unless your credit score and your credit history are nearly perfect.

No-doc loans and low doc loans are both alternative types of mortgage, which are necessary for those who may have non-traditional income or who may be invested heavily in real estate already. But because they are high risk, it’s important that investors look into other options before they secure a no-doc loan. Other, conventional mortgages will usually be more affordable.