No Doc, Stated, Alt Doc Home Loans Explained
Before reviewing the guidelines, the background and product description for alternative document home loans, it is important to be aware that most of these types of mortgage loans are no longer available. Limited variations are still available mostly by portfolio lenders but for the most part, the increased delinquencies and foreclosure rate on these loans has curtailed their use for home purchases as well as refinances.
Stated income loans, no document, no income no asset, SIVA, NINA and no ratio home loans are all variations of alternative documentation mortgage loans. Alternative documentation loans were intended to simplify and expedite the loan approval process. Mortgage lenders may offer a variety of documentation requirements from a full documentation loan to one of almost no documentation, aptly named a no doc loan.
The documentation requirements on a mortgage loan are intended to acquire information about the borrowers income, assets and employment. The varying types of alternative documentation mortgage loans lay the groundwork for how and whether this information will be used by the lender. In addition, the lenders documentation requirements will determine whether and how the mortgage lender will verify the information provided.
These mortgage loans were originally designed specifically for self-employed borrowers with high credit quality and significant amounts of equity or large down payments. Given that the risk to the lender rises as documentation requirements become less rigorous, the rate on these mortgages rise likewise.
A stated-income loan (SIL) or no income verification (NIV) loans were the simplest forms of alternative documentation loans. These home loans are designed to qualify a borrower using the income the borrower states, as opposed to the income the borrower can document. With an SIL or NIV, the lender agrees not to verify the income the borrower states on the application. While a mortgage lender does not verify income on an SIL or NIV, they do verify assets and the actual employment, not the income. From this point of documentation, a whole host of alternatives has crept up to establish the income and asset verification standards. On a no-ratio loan, income is not reported at all; on a stated-income/stated-assets loan, both income and assets are stated; on a no-income/no-assets loan, neither income nor assets are reported; and on a no-doc loan, nothing is reported, including employment.
The advent of these mortgage loans was to provide a means for some borrowers to purchase a home or do a cash out mortgage refinance with fewer documents and close the transaction faster. It afforded some borrowers the ability to maintain more financial privacy and confidentiality. These mortgage loan terms did in fact provide flexibility in mortgage financing for these borrowers. In its infancy, these loans were overlooking the verification of income or the borrower’s capacity to pay and compensating this decision with other factors. To account for this reduction in verification and increased risk, the lender would require greater equity in the property and a stronger credit profile combined with a higher interest rate. It was historically given that borrowers with high credit scores were much less likely to be unreasonable in their financial dealings and fail to make the mortgage payments.
Over time, the standards for credit and equity or down payments were reduced. These mortgage loans were now being offered to a much larger segment of borrowers than the programs were originally intended for. The misfortune on the expansion of alternative documentation loans is that some borrowers, without any practical basis for expecting a rise in income or additional resources of any kind, lied about their current income and took out home loans they could not afford. This irrational behavior of some of these borrowers was most likely encouraged by the behavior of greedy or even predatory loan officers who get paid only if a home loan closes.
With the increase in delinquencies on these mortgage loans, alternative documentation loans are regressing back to the original intention and original strict credit and equity guidelines. A borrower should not be steered to a low documentation or no documentation loan by a mortgage lender in order to speed up the loan application and approval process. Most borrowers should know that they would receive better pricing or a better mortgage rate the more documentation they provide. If an alternative documentation loan is needed, potential borrowers should be comfortable with their financial position regarding the affordability of the loan they may be accepting. As these home loans become more restrictive it is likely that potential borrowers will have to perform an amplified amount of shopping to find the best mortgage rate and terms.