Even in today’s economy it’s still possible under certain circumstances to get a mortgage without having a job. This, despite the fact that the housing crash of 2008 was mainly caused by people who had been given mortgages, even though they couldn’t afford them. In an attempt to continue to make the dream of owning a home a reality for as many people as possible, the government has pushed for new programs that make this possible.
There are different types of mortgages for people with no job or ability to verify income. The most popular is the No Documentation (no doc) mortgage. With a no doc mortgage, the borrower submits no information about their employment or annual income with his application. Instead, the bank is relying on his credit rating and what he’s using for collateral to secure the loan. Keep in mind that the collateral will be key to whether he succeeds in getting this type of mortgage.
Who would use this type of loan?
The fact that it’s possible to get a mortgage without having a job might be an incentive for some individuals to apply even though they have no means to make their monthly payments. Rest assured that banks are not just giving away money and hoping for the best. If you have a poor credit rating and no real property of any value, it’s highly unlikely you’ll get a no doc mortgage. The bank needs something it can rely on before it is willing to take such an expensive risk. That said; the no doc loan is ideal for some people.
For example, someone who makes his living as a day trader technically has no job. He also has no way to verify his income since it’s all tied up in the securities he trades. He would make the perfect candidate for the no doc loan, provided he has a good credit rating, because portions of his securities, along with any other real property he owns, make good collateral. Similarly, people who might be living off a legal settlement or a trust fund from relatives are also good candidates.
What if I have a great job but lousy credit?
The no doc mortgage is a great tool for couples where one partner has a great job and lousy credit and the other has no job but great credit. By listing the latter applicant as the main borrower, that individual’s good credit can be all that’s needed to obtain a loan with proper collateral. In such a case, the verifiable income of the former applicant may or may not be taken into consideration. If it is, that’s an extra bonus. However, if considering such income also requires a good credit rating, it might be best to ignore it.
A variation of the no doc mortgage is known as the no ratio loan. With this type of loan, employment is listed on the application, but is not checked by the bank. The couple with the mixed credit rating might find this loan to be advantageous because the individual with the income is viewed as a contributor, which increases the likelihood that the main lender will be able to make monthly payments. On many no ratio loans, the job and credit history of the supporting borrower are not checked.
Need a down payment with a no doc mortgage?
If you have no verifiable job or income, you will need a substantial down payment. Some lenders advertise that they will write a mortgage of up to 95% of the home’s value, leaving you with just a 5% down payment plus your closing costs. Such cases are the exception, not the rule. Normally, you will need a down payment between 10% and 20% to get a mortgage without a job. Remember that loan to value ratio (LTV) is everything when it comes to being approved for a mortgage.
No doc mortgages can be the conventional type or those backed by government agencies such as the FHA, VA, and USDA. Often, the government-backed loans require a lower down payment and allow a higher LTV. Conventional loans on the other hand, require higher down payments, lower LTV’s, and a certain amount of cash reserve. For example, one regional lender in California is offering no doc conventional loans at 60% of the home’s value with the equivalent of six months worth of mortgage payments in cash reserve.
Are no doc loans the same as “liar” loans?
A 2010 article published on Forbes.com addresses the dynamic of “liar” loans and their impact on the current mortgage industry. If you’re unaware, liar loans are mortgages that were given en masse in the years preceding the housing crash, to individuals who could not prove employment or income. According to Forbes, these loans made up nearly 40% of all new mortgages granted during 2006 in 2007. They were the main cause of the crash that ensued just one year later.
Today’s no doc loans are similar to liar loans, with two main exceptions, the requirement for good credit and substantial collateral. While today’s no doc loans are fundamentally the same, the requirement for decent credit and collateral lowers the bank’s risk. This also makes the mortgages unattractive for individuals who have no business purchasing a home. Although Congress is mulling legislation to discourage these kinds of loans, the mortgage industry is claiming that there no doc products are inherently more secure than those being offered by the FHA and VA.
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