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Applying for a mortgage involves a small mountain of paperwork, including bank and tax statements, pay stubs and proof of employment. If your income is irregular, though, or you lack some of the standard documents of a typical full-time employee, you might not be able to provide that documentation. In this case, you could be a candidate for a no-doc (short for “no documentation”) mortgage — a type of loan that doesn’t require the usual verifications.
A no-doc mortgage — also referred to as a no-income verification mortgage — does not require a lender to verify how much you earn with pay stubs and W-2s. These types of loans are also sometimes called NINJA mortgages, which stands for no income, no job or assets.
“It’s an option that has existed for decades,” says Greg McBride, chief financial analyst (CFA) at Bankrate. “During the housing boom [of the early 2000s], though, this previously niche product came into contact with mainstream borrowers. That was a breeding ground for the problems that led to the housing bust.”
In the years leading to the financial crisis of 2007-09, no-doc mortgage loans tended to be offered by subprime lenders, not major financial institutions, McBride says. However, due to the complexities of the finance industry, even the biggest banks wound up with exposure to the risk of failing to verify a borrower’s ability to repay a loan.
Since then, “no-doc mortgages have gone back to being niche products,” says McBride. “They’re probably even more niche than they were before.”
Historically, any no-doc home loan operated on an honor system: The borrower would state their income without providing any proof. The lender still reviewed their credit history, but it took the borrower at their word on how much they earned. The government has since addressed this.
“You generally cannot rely on what consumers orally tell you about their income,” the Consumer Financial Protection Bureau (CFPB) explains in its handbook for mortgage lenders. “You must verify a consumer’s income using documents such as W-2s or payroll statements.”
What federal laws must lenders follow when giving out a no-doc loan?When lenders make a no-doc mortgage loan, they must adhere to what’s called the ability-to-repay rule. According to this rule, lenders cannot take borrowers at their word about income. Lenders must verify a borrower’s ability to repay a mortgage.
However, the CFPB offers flexibility for documenting how a borrower can repay. For example, a lender could use bank or other financial statements that highlight the borrower’s assets or investment income.
If you have the qualities listed below, you’ll be more like to qualify for a no-doc mortgage loan:
“These are not something available for your typical middle-class or upper-middle-class borrower,” says McBride. “It’s an offering for a high-net-worth individual with rather unique circumstances, such as an entrepreneur who runs a successful start-up and has plenty of equity in the company.”
No-doc mortgage loans come in different forms, and the best no-doc mortgage lenders each have their own requirements for this type of financing. To give you a broad overview of how your no-doc home loan could work, here are a few examples:
A no-doc home loan has the same benefit as conventional mortgages and other types of mortgages: It helps you borrow the money you need to acquire a property. Once you get the loan, it functions in the same way as a conventional mortgage, meaning you repay what you borrowed plus interest on a set amortized schedule.
However, the terms and credit requirements needed to get approved for a no-doc mortgage are different. Simply put, no-doc mortgage loans require higher credit scores and larger down payments than conventional mortgages do.
Even the best no-doc mortgage lenders also tend to charge higher interest rates. Why? Because a borrower who lacks full concrete evidence of regular earned income appears less creditworthy and loaning to them carries a higher default risk.
Like just about any type of loan, a no-doc home loan comes with benefits and drawbacks to consider:
