In the years before the 2008 recession, was a relatively easy process for many people. They simply stated their income and assets, and a lender took their word for it, no documentation required.
Sometimes called NINJA, which stands for “no income, no job and no assets,” these no-doc loans are a thing of the past.
“It really went extinct after the great financial crisis,” says Adam Wiener, president of mortgage provider Lower in Austin, Texas.
With no-doc mortgages no longer an option, some self-employed people may have trouble qualifying for a loan, particularly if they write off a significant amount of expenses, which makes their taxable income low. Fortunately, alt-doc loans offer another avenue to .
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How the 2008 Financial Crisis Permanently Changed the Rules for Homebuyers
No-doc mortgages date back decades, but their use ramped up in the early 2000s. By some estimates, as many as a third of mortgages originated in 2006 had no-doc or low-doc applications.
“That’s just what they did because it was easier,” says Tom Hutchens, president of Angel Oak Mortgage Solutions in Atlanta, which specializes in nonqualified mortgages, the formal name of alt-doc loans.
Without documentation, there was no way to know if someone’s stated income and assets were accurate. When the housing market began to collapse in 2006, many of these borrowers were unable to maintain their payments. They had opted for , and as their rates were increasing, housing prices were falling. That made it impossible for them to refinance or sell for what they owed on the house.
The housing crisis turned into a global financial crisis in 2008, often called the Great Recession. In its wake, lawmakers eyed reforms, including changes to the mortgage industry.
The resulted in rules that, among other things, require lenders to make a good-faith effort to determine a borrower’s ability to repay their debt. The rules also include underwriting guidelines for qualified mortgages and prohibited certain repayment structures, such as .
“All these things were added for protection,” says Bill Dallas, chairman of strategic advisory firm Dallas Capital in Las Vegas. However, the result has been to make mortgages more expensive. “It’s added close to $10,000 a loan in cost.”
It has also locked some people out of qualified mortgages or reduced their purchasing power. For these borrowers, alt-doc mortgages can be a good choice.
The New Class of Alt-Doc Mortgages That Don’t Require Tax Returns
Alt-doc mortgages are nonqualified mortgages, commonly referred to as non-QM loans.
“It just means that it isn’t something that can be sold to or Ginnie Mae,” Wiener says. were the original non-QM loans, he says. also fall into the non-QM category.
An alt-doc loan still assesses a borrower’s ability to repay, but it doesn’t rely solely on tax returns.
“After the financial crisis, the pendulum swung far too far in the other direction,” according to Hutchens. From 2009 to 2013, most lenders were using only tax returns to qualify borrowers, but this method was not ideal for self-employed workers. “Tax returns don’t necessarily reflect their ability to pay off a mortgage,” he says, adding that accountants are usually adept at finding tax write-offs.
The following are some common alt-doc loans that use documentation other than tax returns.
— Bank statement loan. These loans rely on at least 12 months of bank statements to calculate income.
— Debt service coverage ratio loan. Known as DSCR loans, these are common among investors. They are underwritten based on the property and its expected rental income or resale value.
— Asset depletion mortgage. These mortgages may be used by those with limited income but significant savings or other assets.
— Profit and loss mortgage. As the name suggests, these mortgages are approved based on a business’s profit and loss statements.
About 6%-9% of mortgages are non-QM loans, according to Dallas. He estimates that about half of those are DSCR loans for real estate investors or property flippers.
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Why the Current Mortgage Process Is ‘Heinous’ for 1099 Earners
Getting a qualified mortgage — one that can be backed by a government-sponsored enterprise like Fannie Mae and Freddie Mac — typically requires full documentation of someone’s ability to repay.
“The full doc rules were really built for an employee,” Dallas says. “Heinous” is the word he uses to describe the current mortgage process for 1099 earners who are self-employed. “The process was not built for them.”
However, alt-doc loans can be an answer for those who aren’t eligible for a qualified mortgage or have limited buying power based on the amount of their taxable income. For instance, a self-employed person may earn $100,000 each year but have a taxable income of only $50,000 thanks to tax deductions. Using a bank statement loan may mean a person’s qualifying income jumps to $70,000 or $80,000.
Bank statements are “where the rubber meets the road,” according to Hutchens. But it isn’t as simple as adding up someone’s deposits for the year. “We don’t just take deposits,” he says. “We look at the business type and apply an expense factor.”
For example, a consultant with few expenses may end up with a higher percentage of their deposits calculated as available income compared with someone working in a field that requires purchasing supplies or paying contractors.
Once approved, alt-doc loans are serviced the same as any other mortgage, although you may pay a higher interest rate. Wiener estimates that rates for bank statement loans may be 0.5 to 1 percentage points higher than those for qualified mortgages.
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Which Alt-Doc Loan Is Right for You?
Before you start searching for an alt-doc mortgage, you should understand what loan is best for you.
| Buyer Type | Best Loan Product | Documentation Needed |
|---|---|---|
| Buyer With W-2s & Paystubs | Conforming/FHA | 2 Years of Tax Returns |
| Gig Worker (1099) | Bank Statement Loan | 12-24 Months of Bank Deposits |
| Multiplex Earner | P&L (Profit and Loss) Loan | P&L Statement + Business Assets |
| Real Estate Pro | DSCR Loan | Property’s Rental Cash Flow Only |
Even if you are a 1099 worker, you should confirm that you don’t qualify for a
before seeking out an alt-doc loan.
“Some people get swept up in the idea that they need it,” Wiener says, but he notes that many people with 1099 income will qualify for conforming loans. “If your taxable income looks too low, that’s when you’d want to go to the alt-doc loans.”
Some major lenders offer alt-doc loans, or you can use a provider who specializes in non-QM mortgages. Regardless of the type of mortgage you pursue, it is always a good idea to get prequalified before house hunting.
Wiener also suggests that borrowers rethink the . While adjustable-rate mortgages got a bad rap during the financial crisis, they can increase your buying power and may make sense for some people.
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