No-doc loans answer special needs

House on mortgage

Getting a mortgage usually requires piles of paperwork that expose every facet of your financial life and make those of us who have steady jobs and incomes look our best.

But what if you are self-employed and substantially reduce your after-tax income by writing off many day-to-day living expenses as work-related tax deductions? Or, perhaps you work a number of jobs, have a sporadic work record, work only occasionally for a really big check, or deal in cash?

Then you may need to seek a "no-doc" or "stated income" mortgage.

This is not something most of us should consider, no matter how much we'd like to avoid the usual paperwork. You will, after all, pay more for this type of loan.

Nor is it a clever way to outsmart lenders and obtain a mortgage you can't really afford. Too many borrowers are already suffering from "liar loans" concocted by themselves and their mortgage brokers.

No-doc or stated-income loans are for buyers whose financial life doesn't fit the traditional mold.

When you apply for a mortgage the lender will still research your credit history, ask about your assets and probably want to see two or three years of tax returns.

But you usually won't have to document your income as thoroughly as for a typical mortgage, and that's why it will cost you a quarter- or even a half-a-percentage point more.

"It depends on the credit score," explains Tim Kruger, senior vice president, Private Mortgage Banking Group, Sherman Oaks, Calif., "They are taking your word for a lot of things."

Lenders don't like risk, and the riskier a loan is the higher the interest rate they will charge. If you don't fit the traditional mold, and you look bad on paper, then lenders are going to consider you to be a greater risk.

For a stated-income loan, for example, you will have to tell them how much you make. But you won't have to tell a lender how you make any of it, or even if you actually earn all or any part of it, win it, or even if it is given to you.

Even though you do not have to prove that you make the amount that you claim to make, you will have to prove that you have the assets you claim to have, and they will want to see some assets. The amount they will look for depends on the size of the loan. So, you will have to show bank and maybe even brokerage statements, property deeds, or proof that you own a business, precious metals or other things of value. They will also want to see what you owe, and they might ask for copies of income tax returns.

With what's called a no-ratio loan, you don't even say what you earn. That means that the lender does not compute your debt-to-income ratio, which is generally a major factor in a loan. The lender wants to know how much of your income has to go to pay off other debts.

What's important here, Kruger explains, "is the amount of discretionary income that a person has. A 50% debt ratio for someone who makes $50,000 a year is a lot different than for someone who makes $250,000 a year, because the discretionary income gives you more to live on."

For people with high incomes, the debt-to-income ratio is almost meaningless, and once they prove their assets, they don't have to bother even stating their income. They do, however, have to pay for the privilege with a higher interest rate.

A large down payment can reduce the interest rate because lenders know that the more money people put down on a home, the less likely they are to default on the loan. Even if they do default and the lender has to foreclose, it is easier for the lender to recoup the money if the owner has equity in the home.

Kruger says each no-doc or stated-income loan he sees is different. There is nothing routine about them. "The lender will look at each one to see if it makes sense on its own merit."

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