No income verification mortgages, also known as stated loans or reduced documentation loans, were popular in the early 2000s and offered a loan to anyone with a minimum credit score with no verification of income required. These mortgages are high risk to lenders and borrowers, and most lenders have now removed these loans as options for borrowers.
Lenders who do offer stated loans do so at a much higher interest rate, sometimes double the current mortgage rate.
Self-employed home buyers often run into trouble qualifying for a traditional home loan. Reduced document loans, also known as no income verification loans, are popular with self-employed borrowers who have trouble getting approved for a mortgage because they cannot prove steady income or they collect income from various sources.
When the self-employed or non-traditionally employed apply for a mortgage, the lender generally analyzes their debt-to-income (DTI) ratio as too low to qualify. DTI is all monthly debt along with the principal, interest, taxes and insurance (PITI), or the mortgage payment. No income verification loans, on the other hand, use other criteria to qualify borrowers.
To receive any mortgage as a self-employed borrower, the lender will want proof of employment, and a letter from an accountant with the business name, address and your share of ownership. The broker will also verify that you have held continuous employment for at least two years.
The bank will also perform a verification of assets over the last 60 days. Any funds deposited or withdrawn must be accounted for, and no gift funds will be allowed. Because the lender will not verify your income, they will look very carefully at your assets to make sure you have enough in reserves. This typically means a minimum of 12 months of mortgage payments at closing.
Borrowers receiving a no income verification mortgage will also be expected to provide a hefty down payment, typically around 35%. A loan over $1 million will usually require a 50% down payment.
Only borrowers with excellent credit can qualify for a mortgage with no income verification. A credit score of at least 720 is often the minimum accepted.
In addition to the above requirements, borrowers should keep in mind that condominiums and single-family homes are usually the only properties that qualify for a reduced documentation mortgage. Adjustable rate mortgages (ARMs) are often the only mortgage products allowed for no income verification applications.
Where to Obtain a Reduced Documentation Mortgage
While some major lenders offer no income verification loans, they are hard to find and obtain, because lenders face serious risks if the loan goes into default. Private money lenders are usually the best source for reduced documentation loans in California. Terms will be much more stringent on these loans. To qualify, you will need substantial assets and excellent credit.