No-documentation mortgage loans, also called no-income verification loans, make it possible to buy real estate without providing things like W-2s or pay stubs to prove your income. No-doc loans were popular among self-employed home buyers and mortgage lenders prior to the 2008 financial crisis. Though these types of loans are used less often today, they haven't disappeared entirely.
Can you still get a no-documentation loan?
The landscape for no-documentation mortgages changed after the financial crisis as new regulatory guidelines for mortgage lending were introduced. The Dodd-Frank Wall Street Reform and Consumer Protection Act established guidelines requiring lenders to verify a home buyer's ability to repay when underwriting a mortgage loan.
"The truth is, these types of loans have a higher default rate compared to standard mortgages because borrowers who are drawn to these loans tend to have a higher debt to equity ratio," said Connie Heintz, founder of DIYoffer, of the loan type. But, Heintz said, anyone who lacks standard proof of income documents may still apply for a no-doc loans. That's good news if you're self-employed, run a seasonal business or you're retired and primarily draw income from retirement assets and Social Security.
While it's still possible to get a mortgage loan or refinance loan without traditional income verification, you still have to be able to prove to lenders you have excellent credit, checking accounts or saving accounts and the means to make the payments. See what kind of mortgage rates you qualify for by checking Credible's online tool, which allows you to compare multiple lenders at once without any impact on your credit.
Remember, lenders can review the following when making loan decisions for home buyers:
Bank statements and account balances
Credit score and overall credit history
Business and personal tax returns
Lenders can use this information about your personal finances as a form of alternative verification to determine your ability to repay. Your down payment can also be factored in, with a larger down payment potentially making it easier to get approved. Want to see if you qualify for instant streamlined pre-approval? It can take just three minutes if you fill out a few short forms online.
Different types of mortgage loans you could use instead
If you're not able to find a lender that offers no-doc mortgage loans, that doesn't mean you're shut out of buying a home if you're self-employed. It's still possible to qualify for traditional fixed-rate mortgage loans, including conventional loans, FHA loans, USDA loans or VA loans.
There are several things you can do to improve your odds of being approved for a mortgage when you're self-employed. As you weigh different types of loans, keep these tips in mind:
Get pre-approved for a mortgage
Pre-approval means a lender has done a cursory review of your credit and finances to grant initial approval of a home loan. Just keep in mind that pre-approval will result in a hard check of your credit score.
Consider debt consolidation
Reducing your debt-to-income ratio could 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 balances faster.
Improve your credit score
Your credit score is one of the most important factors in mortgage decisions since lenders want to see a history of responsible credit card use. Paying down debt balances, making on-time credit card payments and limiting applications for new credit can all help to raise your credit score.
Keep accurate business records (avoid low documentation)
You may not have W-2 forms or pay stubs to show to lenders but you can still offer proof of income through careful record-keeping of invoices sent and payments received for your business.
Be mindful of business deductions
Deducting business expenses can reduce your taxable income but too many deductions could work against you. If you're planning to buy a home, be selective about what you deduct to avoid reducing your income too much.
Increase your down payment
FHA loans, VA loans and USDA loans are all attractive because of their low down payment requirements. But when you're self-employed, a bigger down payment could help reduce your risk profile with lenders since you're reducing the amount you need to borrow.
Loans guide: Pros and cons of no-doc loans
If you're considering a no-income verification mortgage, it helps to consider the advantages and disadvantages.
No-documentation mortgages could make it easier to buy a home if you're self-employed or run a business. Enhanced consumer protections for these loans make them safer for borrowers by ensuring that you can afford 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.
No-income verification mortgages are rare and you may have trouble finding a mortgage lender that offers them. You may need a higher credit score and/or down payment to qualify if you lack documentation on your income and assets.
The interest rate you pay for no-doc mortgages may be higher than conventional mortgages since the lender is taking more risk.
Heintz said the biggest advantage of no-doc loans is the potential to streamline underwriting since there's less paperwork involved. On the downside, she said buyers may be looking at a 35 to 45 percent down payment in place of 20 percent or less with other types of loans.