Rumor has it that No Doc, Stated Income, and Bank Statement mortgages that were so popular before the 2008 housing bubble are once again becoming available. There is some truth in that statement.
Since the law surrounding income verification changed after the real estate crisis, these non-traditional loan programs are now called “alternative documentation loans”(alt doc loans) and can persist under certain conditions. Stated Income Loans are still available for businesses and investors. For real estate investors, Cash Flow Loans enable the borrower to qualify wholly through expected cash flow on the property. Bank Statement Loans only call for bank statements for income verification and can be useful for the self-employed, investors, independent contractors, and those with seasonal income find home financing. Non-prime lenders offering alt-doc loans are allowing a wide range of credit scores as low as 580.
The best place to find alt doc loans is through small, local non-prime lenders like the kind we can connect you with here at West-Cal Mortgage.
The Rise, Fall, and Metamorphosis of No Doc Mortgages
No-Doc Mortgages (AKA SISA, NINA, or NINJA loans) can be approved without any income-verifying documentation. The borrower’s signature on the loan application counts as testimony that everything the borrower writes on the application is accurate with no further verification needed. This was the most sought-after unconventional loan product in the early 2000’s before the financial crisis in 2008.
No-Doc mortgages are now forbidden by law. Currently, lenders are required to verify a borrower’s income by evaluating bank statements, averaging deposits, and receiving a letter from their accountant or tax attorney.
Originally Intended Purpose of No Doc Mortgages
No-Doc mortgages were originally designed to facilitate home buying for business owners with sufficient cash flow to make payments but too many tax write-offs to qualify for a traditional mortgage. They were also designed to reduce the stress of processing for both lenders and applicants when dealing with a complicated financial position.
No-Doc mortgages began to be misused as lenders started making sub-prime loans with low credit score, low assets, and no down payment requirement. This was all to approve more loan applications faster with higher profits. They had withdrawn the “safety nets” that kept these loans secure.
Non-Prime Lenders for Non-Traditional Borrowers
Non-prime lenders are coming back into the market after the financial crisis and they are taking the place of the sub-prime lenders of the past. Non-prime lenders produce alternative documentation loan programs aimed toward non-traditional clients in unconventional financial situations.
Both Non-prime and Non-QM (Qualified Mortgage – loan application standards to ensure likelihood of repayment) lenders offer great substitute loan products for borrowers that don’t conform to the requirements of traditional mortgage programs.
Alt Doc Loans Fit Specific Needs
Alternative Documentation loans (AKA Lite-doc loans) are the present-day counterpart to No-Doc loans, though they are much different and have been successful so far. They are useful when a borrower has the capability to pay for a mortgage, but their income documentation is unconventional. Alt Doc loans cater to the specific needs of borrowers in unique financial positions.
Alt Doc loans are more expensive than traditional loans because the demand is high and such loans are perceived as more risky than traditional loans by lenders. However, current low mortgage rates are sufficient to make even alt-doc loans affordable.
Stated Income Loans
Stated Income loans are a forms of alt doc loans that do not require the lender to authenticate borrower income at all. Instead, loans are issued according to the income stated on the loan application. This type of loan was also sought-after among borrowers that had difficulty fully verifying their income in the early 2000’s before the financial crisis and was made illegal by the 2010 Dodd Frank Act. Lenders were meant to only issue loans if applicants could assure ability-to-repay some other way, but underwriting standards declined and Stated Income loans became a threat to the housing market.
However, Stated Income loans survived the housing bubble with a few limitations. There are two prominent, present-day, alt doc equivalents to Stated Income loans offered by non-prime and non-QM lenders; Cash Flow loans and Bank Statement Loans. These are designed to allow self-employed borrowers, independent contractors, investors, and seasonal income borrowers with unconventional or complicated income documentation to qualify for home loans.
Cash Flow Loans
Because the law that dictates income verification requirements for home loans only applies to owner-occupied housing, investors in real estate can acquire mortgages on investment properties without presenting income documentation. These loans are underwritten by lenders according to the expected cash flow or rental income of the property.
Lenders look at a borrower’s personal credit history, type of property, and quantity of down payment when deciding on rates or whether to issue a loan. Cash Flow loans have higher interest rates and down payment requirements than traditional home loans. They also may only be accessible to property managers or people with a history of rental ownership.
Cash Flow loans can be quite useful for property investors wanting to save capital for other investments instead of tying it up in a property. It allows for more adaptability.
Bank Statement Loans
Bank Statement loans allow lenders to make loans that don’t follow the Ability-to-Repay (ATR) rule that requires lenders to make a legitimate effort to verify a borrower’s ability to repay a loan. They are, essentially, Stated Income loans for self-employed borrowers. There is no requirement to present tax returns, eliminating the interference of write-offs by requiring only bank deposits to figure out borrower income
These loans come with higher down payment requirements and interest rates than traditional loans, but the tradeoff may be worth it. It is always an option to refinance into a conventional loan with a lower rate in the future when you can report more income on your tax returns.
Bank Statement loans can be useful for business owners that want to get a loan or a mortgage, but do not meet the income requirements after tax write-offs for traditional mortgages. They are also useful for the self-employed, independent contractors, and those with a seasonal income who have a difficult time verifying taxable income without a W-2.
Where to Find Alt Doc Loans
Small, local, and specialty lenders like the ones we offer here at West-Cal Mortgage in Sebastopol, CA, are the most reliable sources for alt doc loans. They usually accept non-prime and non-QM loans.
Alt doc loans can be harder to find than conventional loans, but your search ends here at West-Cal Mortgage, because we have what you are looking for!
We offer alt doc loans to people in the county of Sonoma, the cities of Santa Rosa, Sebastopol, and Los Angeles as well as throughout the state of California
If you are interested in any of these loan products, contact Dan Eichhorn…
Office Phone #: 707-824-8081
Cell #: 707-490-9413