No-documentation loans meet specific needs

Because her consulting income came from many sources, Chrystal Arnet needed a mortgage loan with no income verification requirements. She consulted a lender about applying for a no-documentation loan and learned that such loans are useful only in very specific cases. 

With "no-documentation" loans, little or no verification is required to substantiate the borrower's income and assets. These loans can be useful to self-employed borrowers who have difficulty verifying their income or for service industry employees, such as bartenders, waiters and hair stylists, whose income may be difficult to precisely determine.

These loans also may be used by borrowers who get most of their income from commissions or those who have complex income structures. For example, a borrower who has income primarily from rental properties and investments may be hesitant to verify all income sources due to the amount of paperwork that may be required.

These limited loans are generally classified as "stated income," "stated assets," "no income verification (NIV)," "no income/no asset (NINA)," “no ratio," or "no documentation."

In Chrystal's case, a "stated-income" loan would allow her to simply state her income on the application without providing any documentation to verify her statement. Lenders usually do, however, verify that the borrower has assets that logically match the stated income and may attempt to verify that the borrow is employed.

Because of the risk to lenders associated with no documentation loans, it was important that Chrystal keep the following in mind:

She may have to make a larger down payment. In many cases, the loan-to-value ratio on a no-documentation loan is 70 percent to 75 percent. Some lenders, however, will allow a 90-percent ratio, meaning that at a minimum Chrystal would need to put down 10 percent of the sales price or value of the property.

Credit standards are higher for no-documentation loans. Chrystal must have maintained a good repayment history within the previous two years. Property value also is given more weight. Some lenders require borrowers to maintain higher bank balances than typical applicants usually must have.

The interest rate and fees on a no-documentation loan are higher because the loans are considered to carry a higher risk of default than full-documentation loans. Chrystal could expect the interest rate to be about one-half to 1 percent more than the rates on a fully documented loan.

Consequently, no-documentation loans should be used only when specifically required, such as in Chrystal's case, not simply to avoid documenting income or assets.