Mortgage lenders typically have several requirements that are necessary before an approval can be issued to an applicant. The lender needs to analyze the borrower�s complete situation to determine their level of risk, and the appropriate interest rate to accompany such risk. There is standard paperwork and several documents that lenders request from the buyer to compile a complete profile, and it is extremely difficult to appropriately assess risk without a complete file.
What exactly is a Stated Income/No Doc Mortgage?
Many borrowers have adequate income to easily handle the monthly payments for the mortgage they request, yet could run into difficulty obtaining approval based on their inability to provide some of the typical paperwork requested by their lender. For borrowers in such situations, most lenders offer an option for the applicant to proceed with merely a statement of their situation, rather than requiring black and white proof.
The most common point when borrowers request to proceed without documentation is when presented with questions about their income. Most lenders require the applicant to have maintained a steady job with the same company for a minimum of two years, so those borrowers with new or inconsistent employment will often �state� their income to the lender without providing paystubs or tax returns.
The second most common point when borrowers request to go �No Doc� is when asked about their current assets. Mortgage lenders will permit the applicant to simply tell them about account balances and savings, rather than providing copies of statements.
What is different about the loan contract?
Borrowers who proceed with a No Doc loan must expect to pay higher interest rates. Since the lender is unable to verify the accuracy of the information provided, they have no legitimate way to determine actual risk of financial loss. Therefore, to address the issue of such additional risk, they will charge a higher interest rate to these borrowers.
Those applicants who proceed with both stated income and stated assets must expect to pay an interest rate that is even higher that for those applicants who go No Doc in only one of these areas. The No Doc application process is usually shorter than Full Doc because there is less information for mortgage underwriters to analyze. This type of application process is most appropriate for borrowers who are independent contractors, self-employed, or who work on commission.