Many loans are known to have very stringent paperwork. While it is important to provide income and employment documentations, a few are discouraged because there is just no way they can get hold of some of these papers.
There are actually loans that do not require any or much documentation, depending on the lender. These are called No Doc or Low Doc Loan.
There are individuals who have a hard time qualifying for a financial product due to the lack or inability to provide certain documentations. Because of fluctuating income, such as commission-based salaries or the self-employed, verifying these incomes can be difficult.
Sometimes, this loan product is also offered to patrons who have shown consistency in their payments and have strong credit standings.
Because the essential documents needed for income verification is absent, borrowers are asked to shell out a larger down payment. And while this type of loan is easier to qualify for, interest rates may be higher compared to the conventional counterparts.
No Doc Loan
Loan products that do not require any proof of an applicant’s income are considered No Doc Loans. And because they lack the requirement to be able to make verifications on the borrower’s assets and ability to repay, they may fall under the non-qualified mortgage loan category.
Although there are residential loans of such kind, most of the time No Doc Loans are used to cover business expenses or for investment properties.
Between No Doc and Low Doc Loans, the former will take on higher interest rates and larger down payment aside from other fees. Interest rates may very well fall between 2% to 6% monthly. This is because the loan approval is just based on a declaration that the borrower can afford to make the payments without substantial proof to support the claim.
Low Doc Loan
Low Doc Loans still fall under the non-conforming loans. This is because even though there is a little documentation provided, it does not meet the minimum requirements the National Consumer Credit Protection Act sets.
This loan is designed to help the self-employed to get a loan. Because self-employed borrowers are not about to provide tax returns as proofs of income, they can give any other supporting proof of their income. This can be in the form of bank transactions records and statements, accountant’s declaration or business activity statements.
Why do these loans exist?
When the recent US housing bubble burst, the government tried to contain the damage by creating new rules which were then enacted into laws and did regulatory reforms.
These new regulations mandated lenders to have minimum standard documentation processes to verify the loan applicants’ incomes. This is to be able to establish the borrower’s ability to repay the loan and capacity to afford it.
What the new laws failed to see was that there are many individuals who cannot provide such documents but can very well afford the loan. And because there are consumers who need such a loan product, lenders designed non-conforming loans to cater to them.
No Doc and Low Doc Loans are not for everyone but there is a certain market for them. Learning about them, however, may widen your options when you are looking for financing.
To learn more about these types of loans and any other loan type, do not hesitate to speak with a lender. A loan professional can help you assess your financial situation and give you advice so you can make informed decisions.