No-Doc Loans - Buying a House Without a Job
By Steve Gillman - 2006
The "no doc" in no-doc loans is short for "no
documentation." The mortgage lender may not require any
documentation of income or employment for these types of loans.
This doesn't quite mean no documents at all will be required,
and in fact, it can mean different things to different banks.
For example, when we got the loan on the house we are in now,
we didn't have jobs. We couldn't provide evidence of a decent
income, so the lender made it clear that we shouldn't even mention
what our reported income was for the previous year. Our new business
was becoming very profitable in recent months, but our last tax
return would have shown an income too low to qualify us for anything.
We had to have a loan based on credit scores. Since my wife
and I have always paid everything on time and had good scores,
this was easy. However, we did have to document when we started
our business, and the usual appraisal of the home we were buying
was needed. "No doc" obviously doesn't mean no documents,
but rather limited documentation requirements.
Actually, many such loans are referred to as "no income
verification" loans. You may still need to verify that you
have a job or a business, but not how much income it provides.
These types of loans may be called "partial documentation
loans," or "low documentation loans," as well.
Some may require that you state your income without proof. These
are sometimes called "stated income" loans.
Why Consider No-Doc Loans?
Our loan cost us 7.25% when the typical 30-year mortgage loan
was charging 6% interest - typical of no-doc loans. A higher
interest rate is a given, because these loans are considered
a higher risk. I know a woman who obtained a no-doc loan at 11%
annual interest while 6% was normal for conventional loans. Why,
then, would you want such a loan?
The simple answer: because you have no better option. For
example, we had money in the bank and a growing business, but
the business had just started to really take off, and we couldn't
show income sufficient for any loan from our last tax return.
We had good credit scores, however, so if we wanted to buy a
house, we had to rely on those alone.
Maybe you have a great job, but were unemployed last year,
so you face a similar situation. Or consider that although getting
a better job seems great to you, to a lender, if the job is too
new and in another field than your previous job, it shows an
inconsistent employment history. In other words, you might have
to rely on your credit score to get that mortgage loan.
When you get a no-doc loan, credit score matters - a lot.
Our 7.25% rate seemed high until compared with that 11% loan
I saw - one has to wonder what her credit score was.
Consider the future when looking at these loans. If we were
within a month or two of filing the next years tax return, for
example, we could have waited to buy a house with a regular mortgage
loan at 6%. You can also look at a no-doc loan as temporary.
Once you have documented income from a business, or enough time
on the job, or have otherwise corrected whatever the problem
is, you can get a new loan. If I had an 11% mortgage loan when
6% was available, I would certainly hope that it was temporary.
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