How Do No Doc Mortgages Work
Historically, no doc mortgages operated on a bit of an honor system: The borrower would state their income without providing a load of paperwork to back up their claim. The lender still reviewed their credit history, but they took the borrower at their word on how much they earned.
The government has since addressed that with whats called the ability-to-repay rule. In short, under this rule, a lender must figure out if you can actually pay back a mortgage.
You generally cannot rely on what consumers orally tell you about their income, the Consumer Financial Protection Bureau explains in its handbook for mortgage lenders. You must verify a consumers income using documents such as W-2s or payroll statements.
However, the CFPB offers flexibility for documenting how a borrower can repay. For example, a lender could use financial institution records that highlight the borrowers assets to help process a loan.
What To Do If You Dont Qualify To Refinance Your Mortgage
Unfortunately, not everyone will qualify for mortgage refinancing. Here are a few reasons why your application could be denied:
- Your credit score is too low: If you have poor credit, focus on improving it. Be sure to make all of your monthly payments on time and pay down existing debt.
- You have a high DTI: If your DTI is too high, try to reduce your monthly obligations by paying down debt like credit card balances, personal loans, or car loans. If you have high minimum payments, a debt consolidation loan might help reduce your monthly payments and lower your DTI.
- You have a lien on your home: A mortgage itself is a voluntary lien. But if you have an involuntary lien , youll need to clear the lien before you can refinance. You can search for liens at the county recorders office or with a title company. Once youve resolved a lien , be sure to file a notarized Release of Lien form to clear your title.
- Youre underwater on your mortgage: Being underwater on your mortgage means you owe more than your home is worth. If this is the case, look into programs designed for people with declining home values. The Federal Housing Finance Agencys Home Affordable Refinance Program and Freddie Macs Enhanced Relief Refinance Mortgage program are two options if youre underwater on your mortgage and want to refinance your home.
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The Numbers That Matter More
Lenders are more interested in your three-digit credit score, which shows how well you’ve paid your bills and handled credit in the past, and your debt-to-income ratio. This ratio measures how much of your gross monthly income is gobbled up by your monthly debt obligations.
Lenders want your total monthly debts, including your estimated new mortgage payment, to equal no more than 43 percent of your gross monthly income. If your ratio is higher than that, you’ll struggle to qualify for a loan. Lenders also view three-digit FICO credit scores of 740 or higher to be excellent scores. Scores in the 700 range will generally net lower mortgage rates and easier approvals.
If these two numbers are strong, that two-year job history isn’t as important. As long as you have enough income to support your monthly payments, most lenders will overlook the fact that you took a new job three weeks ago.
“The two-year job history is a myth,” said Bob Gordon, real estate agent with Berkshire Hathaway in Boulder, Colorado.
Gordon pointed to the two recent college graduates, both with no work history, whom he helped buy homes in the Boulder area. The two buyers hadn’t even started the new jobs they accepted, presenting lenders only with a letter of intent from their new employers. The two also had short credit histories, but they were good histories, with no missed or late payments on their records.
Take The Mortgage Stress Test
Dont forget the mortgage stress test. Unless you renew with your current lender, youll have to requalify all over again, even if you have 20% or more down. A GDS less than 35% and TDS under 44% are required, plus a credit score of 680 or more if you have less than 20% for the downpayment. You must be able to afford 2% over and above the interest rate being offered by your lender or the Bank of Canada five-year, fixed posted mortgage rate, whichever is higher.
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What Happens If You Lose Your Job During The Mortgage Process
Losing your job is one of the most stressful life events you can experience. And theres never a good time to suddenly find yourself unemployed. But what happens if you lose your job when youre in the middle of buying a home? Should you give up on your plans to secure a mortgage? Not necessarily. You have options, and its important to review them carefully before making a decision.
How Refinancing Your Home Can Affect Your Credit
Refinancing can impact your credit scores in several ways, as you’ll be paying off your old loan and applying for and taking out a new one. Overall, however, the impact may be minimal.
Applying for a refinance loan can lead to a hard inquiry, which may hurt your credit scores a little. Additional applications that cause more hard inquiries could increase that negative impact, but multiple hard inquiries for the same type of loan will only count as one hard inquiry if they occur within a 14- to 45-day period . This means you’re still able to rate shop to try and get the best rate.
The new loan will also decrease the average age of your accounts, which could hurt your scores a little. Your original mortgage will be paid off and closed, but your payment history on that loan can continue to help your credit, as the account will stay on your credit report for up to 10 years. Continuing to make your payments on time on the new loan can also help your credit.
Make sure a mistake or delay during the refinance process doesn’t lead to you accidentally missing a payment on your original mortgage. Otherwise, a late payment could be reported, which could lead to a large score drop.
Engage A Housing Counseling Agency
Housing counseling agencies are approved by the U.S. Department of Housing and Urban Development to provide advice on issues facing homeowners such as refinancing when unemployed.
In conjunction, the U.S. government has established loan modification or refinancing programs, as applicable, for unemployed homeowners. These options are:
- Home Affordable Modification Program is one way to lower your monthly mortgage payments to 31% of your verified, pre-tax monthly gross income. As the HUD site notes, a HAMP modification usually results in a 40% drop in monthly mortgage payments.
- Home Affordable Unemployment Program: Designed for homeowners who are struggling to meet their monthly mortgage obligations because they are out of work, UP calls for the suspension or reduction of these mortgage payments for at least 12 months while you find work again.
- FHA Special Forbearance: On behalf of qualified borrowers who have no work or other alternative income, the FHA will ask the loan servicer to extend the loan forbearance period, either through mortgage payment suspension or reduction also for 12 months.
- FHA Streamline Refinance: Income is not a determining factor when refinancing your existing FHA loan under FHAs Streamline Refinance, for as long as you meet its other requirements. These include a show of net tangible benefit, a 210-day waiting period, and no late payments within three months prior to the refinance application.
What Happens If You Lose Your Job Right Before Closing On A Mortgage
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A temporary or permanent loss of employment in the middle of applying for a mortgage to buy or refinance a home can seem like a nightmare scenario. If you’re losing a paycheck, you’ve got enough to worry about. Let’s get you through this.
After you’ve recovered from the initial shock , call the lender and tell it exactly what’s happened.
If youre purchasing a home. Without a steady check in your future, you probably don’t want the added burden of a new loan. Having the job loss occur while getting the loan although painful to no end may feel like fortunate timing after a few months.
If you’re refinancing. Even a refinance with a lower payment is likely to be at risk of closing with an employment interruption. There’s little chance that your loan will “slip through the cracks” without the lender becoming aware of your employment situation.
Lenders will verify your employment days before you sign the paperwork.
Depending on your situation, here are some scenarios and how they may play out.
Will Lenders Count My Higher Income After A New Promotion
If you are paid hourly and your hours vary from week to week, lenders average your income over the last two years. But if your hours per week do not vary, your lender calculates your income based on your higher hourly rate.
If you are promoted from hourly to a full-time salaried position, lenders do not average your income. They use the new salary.
This holds true as long as the full-time status can be verified through an employment offer letter and/or verification of employment.
No Doc Mortgages Vs Other Loans
A no doc mortgage has the same benefit of other types of home loans: It helps you borrow the money you need to acquire a property.
However, the terms and credit requirements needed to get approved for a no doc mortgage are different. Simply put, no doc loans require higher credit scores and larger down payments.
They also tend to charge higher interest rates. Why? Because not having full concrete evidence of income carries a higher risk of default.
|Varies, but expect to pay several percentage points higher than conventional loans|
What Are Todays Rates
Mortgage applicants are getting approved at the highest levels this decade. Even if you think you cant receive an approval, its worth checking your home mortgage eligibility.
Freddie Mac Asset Depletion Mortgage
For awhile now , Freddie Mac has outlined an alternative to income based mortgages. Then late 2020 they updated this guidance. This is important because in many cases a mortgage companies entire business is just creating loans and selling them to Freddie Mac The sole criteria for these companies is, will FM buy it?
The asset depletion mortgage goes like this take 100% of your brokerage account minus home down payment and 70% of your retirement accounts and divide over the life of the loan This is your income.
Now apply debt-to-income requirements and you get your maximum mortgage payment
From there you can reverse determine the maximum mortgage amount factoring in the FM required 20% down payment.
Example:$1 million brokerage + 70% * $1 million IRA = $1.7 million1.7 million / 360 = $4,722 monthly income50% max debt-to-income = $2,361 mortgage payment
Now, reverse calculate the taxes and insurance, work through the amortization, carry the one, and we get a house purchase price of ~$550,000 with a mortgage of ~$440,000.
Or a home purchase of ~25% of total liquid net worth.
In any case, based on Freddies guidance more lenders should be able to offer mortgages to the non-working members of society.
If in doubt, ask. I want an asset depletion mortgage. I have a lot of assets but little/no income.
Where Can I Get A No
You can begin researching your options for these types of loans with a portfolio lender or a mortgage broker who works with portfolio lenders on your behalf. If you have retirement or investment accounts with a major financial firm, look into its mortgage lending options offered to current clients as well.
Each lender determines its own qualifying criteria based on its tolerance for risk and the requirements of its investors. However, lenders will often require higher credit scores, larger down payments and lower loan-to-value ratios than similar full-documentation loans.
Instead of tax returns, the lender may request 12 months of bank statements to determine your monthly cash flow. Rather than review your asset accounts, the lender may request two appraisals to confirm the value of the property and your equity stake in it. In general, lenders will be looking for compensating factors to stand in for the information they arenât gathering in the form of pay stubs, tax returns or asset statements.
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Ive Lost My Income Because Of Covid
During these unpredictable times, many workers have seen a dramatic reduction in their income, with many unable to earn throughout the coronavirus.
Self-employed workers are particularly vulnerable with some lenders already cautious to lend to applicants with unstable incomes,
So what does this mean for those that had hopes of applying for mortgages in the near future? Will a dip in income prevent their mortgage applications from being approved or will some lenders consider taking other factors into consideration?
Meet Credit Score And Dti Requirements
Next, make sure your credit score and debt-to-income ratio meet lenders refinancing requirements.
Here are the typical criteria youll have to meet:
- For a conventional mortgage refinance, youll generally need a credit score of 620 or higher. But some government programs have credit score requirements as low as 500 or even no credit score minimum at all, such as with the Department of Veterans Affairs Interest Rate Reduction Refinance Loan.
- DTI ratio: Your DTI ratio is the total amount of your monthly debt payments divided by your gross monthly income. This is what lenders look at when deciding if youll be able to afford your mortgage payments. In most cases, the highest DTI you can have to get approved for mortgage refinancing is 43%.
Learn More: When to Refinance a Mortgage
How To Buy A House When Job Security Is Tentative
Buying a home without a job is possible, but it’s not easy. If you can’t prove to a lender that you have a steady job, you’ll instead need to prove that you have a sizable savings account, lots of liquid assets or a reliable source of income other than a traditional job. You can also help yourself if you have impeccable credit, a sizeable down payment or a co-signor. In some instances, those without a job can purchase a home through an owner carry-back arrangement in which the home’s current owner agrees to act as the lender.
An Adequate Credit Score
Your credit score has a direct impact on your ability to refinance. Your credit score is a number that ranges from 300 850 and is used to indicate your creditworthiness.
Lenders look at your score to determine how likely you are to repay your debts. Your current credit score also determines whether youre eligible for a refinance and also the mortgage interest rate you can get for your refinance.
Tip : Check Your Debt
Your debt-to-income ratio, or DTI, is the percentage of your gross monthly income that goes toward paying your monthly debts. Lenders pay attention to it because youre a less risky borrower when your DTI is low. That means you have more budget for a mortgage payment.
To calculate your DTI, divide your monthly recurring debt by your monthly income before taxes. Fluctuating monthly bills such as utilities, property taxes, groceries and repairs arent considered debts and arent taken into consideration when calculating DTI.
If your DTI is more than 50% and you want to get a mortgage, focus on reducing your debt before applying.