What Is a No Doc Mortgage? Do They Still Exist?
A "no doc" mortgage is - in its simplest form - exactly what it sounds like. These special types of mortgages don't require income verification, proof of employment, or really, any documentation at all. Now, the original purpose of such loans (as you may expect) was to help people with nontraditional employment or difficult to verify income. When these types of loans were first available, it was in an effort to help people find homes and get the financial backing they needed to make such large purchases. Unfortunately (and that's putting it lightly), this system was abused by many lenders - and many borrowers. Because of the lack of documentation, these no doc loans became known as "liar's loans," simply because people were applying for mortgages they couldn't afford, banks were approving them to make a quick buck, and well, it was a contributing factor the housing crisis of the early 2000s. As such, these wide open no doc loans are far less common today. That's not to say that self-employed or nontraditionally employed people can't find mortgages, or even that unverified loans no longer exist... Nowadays, however, certain protections are in place to avoid the problems of the past. Truly "no doc" mortgages aren't so easily come by - in fact, they barely exist at all! Instead, options for alternative documentation or "non-QM" loans have taken the place of no doc mortgages. These types of mortgages are still geared toward those with nontraditional income, but must follow the Ability to Repay (ATR) rule. Complying with ATR means that lenders must determine, to the best of their ability, that a borrower can't take out a loan they can't afford - which means income verification in one way or another. This can be done through bank statements, business profit and loss documents (prepared by a CPA), tax returns, etc.
While some loans still exist that allow for stated income or other limited documentation, the housing crisis was a wake up call for the entire industry. Not only do modern regulations affect the mortgages available, lenders have also taken steps to protect themselves from the risks of unverified income. Generally speaking, this means that limited documentation loans (about as close as you can get to a truly no doc loan) are going to require a great credit score and a significant down payment - sometimes as much as 30 or 40%. Of course, there are other qualifying factors like debt-to-income ratio, assets, and even projected profits if you're a business owner... But all of these serve to prove your ability to repay the loan, protecting the lender, your future, and the housing industry at large. So, all of this means that no doc mortgages are, for all intents and purposes, a thing of the past. They caused problems, backfired on the people who thought they were taking advantage of an opportunity, and contributed significantly to a period of economic crisis...
Today, self-employed borrowers do have options, but they are not quite as broad as in years past - and that's good for everyone.