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When I first heard the term “no-document mortgage”, I thought of several other oxymorons: metal woods, fun run, and plastic glasses, paid volunteers, and legally drunk. Then, I flashed back to the heap of papers I signed for my first mortgage back in 1987, and recalled nursing my writer’s cramp for the days to follow.
“No-document” does not mean that you, the borrower, have nothing to sign at closing. No, no, no. It simply means that the lender does not require that you prove your financial solvency with documents in order to get a mortgage—no tax returns, no 1099s, no W2s, and no pay stubs. “No-document” lenders do require, however, exceptional credit scores and normally at least a five-percent down payment to finance your primary residence. These lenders acknowledge that it is very unlikely that you will default on a mortgage if you have a proven record of handling your smaller bills reliably. The costs associated with “no-document” mortgages are similar to those of conventional mortgages with two notable exceptions. First, some lenders may add an origination fee to cover their administrative costs. Second, because the lender is assuming a sizable risk by not reviewing your income and assets, you will usually pay a higher interest rate for your mortgage—up to two-percent higher than the going rate for a 30-year, fixed-rate mortgage. Even in light of the costs, “no-document” mortgages have become highly desirable for self-employed business owners, seasonal workers, sub-contractors, commissioned sales people with low based salaries, and buyers with less than two years in their career fields. This is especially relevant to middle managers caught in corporate America’s down-sizing. Recently a Realtor paged me on a Sunday night and said he wanted to place a bid for his buyer on a $250,000 home with 20-percent down. Two problems though. The buyer was self-employed and could not prove it, and the buyer did not have access to most of his personal files because they were in storage. “Can you get him a loan?” the Realtor asked me anxiously. I checked the buyer’s credit scores, verified a few things with the buyer, and then said “Yep”. Like many others, this buyer now sees “no-document” as “no hassle”. Timothy Phillips is a mortgage banker and newspaper columnist. Homebuyers should always consult a professional for guidance specific to their situation.
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