No documentation mortgage loans, also called no-income verification loans, make it possible to buy real estate without things like: W-2s or pay slips to prove your income. Before the 2008 financial crisis, no-doc loans were popular among independent homebuyers and mortgage lenders. Although these types of loans are less commonly used today, they have not completely disappeared.
Can you still get an undocumented loan?
The landscape for undocumented mortgages changed after the financial crisis when new regulatory guidelines for mortgage loans were introduced. The Dodd-Frank Wall Street Reform and Consumer Protection Act established guidelines that require lenders to verify a homebuyer’s ability to repay when taking out a mortgage loan.
“The truth is that these types of loans have a higher default rate compared to standard mortgages because borrowers who are attracted to these loans generally have a higher debt-to-equity ratio,” said Connie Heintz, founder of DIYoffer, of the type of loan. But, Heintz said, anyone who doesn’t have standard proof of income documents can still apply for a no-doc loan. That’s good news if you’re self-employed, run a seasonal business, or if you’re retired and mostly earn income from retirement assets and Social Security.
While it is still possible to get a mortgage or refinancing loan without traditional income verification, you still need to be able to prove to lenders that you have excellent credit, checking or savings accounts, and the resources to make the payments.
Although Credible does not offer this type of mortgage, you can check out their online tool to see what kind of mortgage rate you qualify for and compare multiple lenders at once without any impact on your creditworthiness.
Remember that lenders may consider the following when making homebuyer loan decisions:
Lenders may use this information about your personal finances as a form of alternative verification to determine your ability to repay. Your deposit can also be factored in, with a larger deposit that may make it easier to get approved. Want to see if you qualify for instant streamlined pre-approval? It may only take three minutes if you fill out a few short forms online.
Different Types of Mortgage Loans You Can Use Instead
If you can’t find a lender that offers undocumented mortgage loans, that doesn’t mean you can’t buy a home if you’re self-employed. It is still possible to qualify for traditional fixed-rate mortgages, including conventional loans, FHA loans, USDA loans, or VA loans.
There are several things you can do to increase your chances of getting a mortgage approval if you are self-employed. When weighing different types of loans, keep these tips in mind:
Get pre-approved for a mortgage
Pre-approval means that a lender has done a cursory assessment of your credit and finances to grant the initial approval of a home loan. Keep in mind that some traditional lenders may require a hard investigation for pre-approval.
However, you can obtain pre-approved rates through a online marketplace like Credible without affecting your credit score. Want to see if you qualify for instant streamlined pre-approval? It may only take three minutes if you fill out a few short forms online.
Consider Debt Consolidation
Reduce your debt-to-income ratio can help improve your credit score and overall finances in the eyes of mortgage lenders. Debt consolidation can streamline your payments so you can pay down deposits faster.
Improve your credit score
Your credit score is one of the most important factors in mortgage decisions, as lenders want to see a history of responsible credit card use. Paying off debt, making timely credit card payments, and limiting applications for new credit can all help to: increase your credit score.
Keep accurate company records (avoid low documentation)
You may not have W-2 forms or pay stubs to show to lenders, but you can still provide proof of income through careful records of invoices sent and payments received for your business.
Take business deductions into account
Deducting business expenses can lower your taxable income, but too many deductions can work against you. If you’re planning to buy a home, be selective about what you deduct to avoid dropping your income too much.
Increase your deposit
FHA loans, VA loans, and USDA loans are all attractive because of their low down payment requirements. But if you’re self-employed, a larger down payment can help reduce your risk profile with lenders as you lower the amount you need to borrow.
Loan guide: advantages and disadvantages of no-doc loans
If you are considering a mortgage without income verification, it helps to consider the pros and cons.
Mortgages without documentation can make it easier to buy a home if you are self-employed or have a business. Enhanced consumer protections for these loans make them safer for borrowers by: make sure you can pay your mortgage payments.
Inconsistent income doesn’t necessarily count against you if you have other assets or cash flow to support a regular mortgage payment.
Mortgages without income verification are rare and you may have trouble finding a mortgage lender to offer them. You may need a higher credit score and/or down payment to qualify if you don’t have documentation of your income and assets.
The interest you pay on no-doc mortgages can be higher than conventional mortgages because the lender takes on more risk.
Heintz said the biggest benefit of no-doc loans is the potential to streamline adoption because there is less paperwork involved. On the other hand, she said buyers may be looking at a 35 to 45 percent down payment as opposed to 20 percent or less on other loan types.