Before the housing crisis, no documentation loans could be found on every corner. What happened to them post-crisis though? What if you can’t verify your income the standard way? Are you out of luck?
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Luckily, we have some good news. There are still ways to get a loan without standard income documentation. They are called ‘low documentation’ loans rather than no documentation. The bad news is you do have to verify your income in some way, though. You cannot just state your income and have the lender take your word for it. Even if the lender does not write Qualified Mortgages and is willing to take a chance, they must follow the Ability to Repay Rules. We discuss them below.
What are the Ability to Repay Rules?
The Ability to Repay Rules requires lenders to make sure you can afford the loan. It does not mean you must provide paystubs, W-2s, or tax returns. You can verify your income in an alternate way, such as with asset statements. Whichever way you look at it, though, you must provide some proof of your income.
The Ability to Repay Rules goes a few steps further, though. They also require:
- Proof of your employment (verbal or written from your employer)
- Proof that you can afford the payment including the taxes and insurance
- Proof that you have decent credit that proves you can handle another loan
- Proof of a debt ratio that is no more than 43%
Using Assets in a No Documentation Loan
You might think qualifying for a loan with assets is not a no documentation loan. It is, just in a different way. On a standard loan, a lender would require you to provide your last two paystubs, W-2s for the last 2 years, and your last 2 years’ tax returns.
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On a no documentation loan using assets, you would provide your last 12 months’ bank statements. These bank statements should prove to the lender that you have a steady income. You do this by showing consistent deposits based on the income you claim. For example, if you say you make $5,000 per month, there should be $5,000 deposited in your account each month. It could be weekly, bi-weekly, or once a month.
However, there is another way you can use your assets to qualify for the loan. If you don’t have consistent deposits, but you do have enough assets to cover the loan, you may qualify. Here’s how it works:
The lender will take your total assets available and multiply them by 70%. Let’s say you have $600,000 in investment accounts. The lender will use $420,000 for qualifying purposes. From this amount, however, they must deduct any money you need to put down on the home or for closing costs. Let’s say that total is $20,000. This leaves you with $400,000. Now, the lender will divide this amount equally among the number of months you’ll borrow the money. Let’s say you take out a 20-year loan. That’s 240 payments. The lender would then qualify you using $1,667 as your monthly income.
Examples of Liquid Assets
- Stocks
- Bonds
- Retirement accounts
- Inheritance money
- Lawsuit earnings
The largest hurdle you will jump when trying to get a no documentation or low documentation loan is the debt ratio issue. Lenders cannot give you a loan if your mortgage payment and other monthly debts do total less than 43% of your gross monthly income. As long as you can prove your income in some manner and it allows you to have a low enough debt ratio, you may qualify without standard income documentation.
