No Documentation (No Doc) Mortgages: How It Works, Types

What Is a No Documentation (No Doc) Mortgage?

A no documentation (no doc) mortgage is a loan to buy property that doesn't require income verification from the borrower. This type of loan, now virtually illegal, is instead approved on a declaration that confirms the borrower can afford the loan payments.

No doc mortgages were commonly given to those whose incomes aren't easily verified, so they are higher risk borrowers. Largely unregulated, these loans were mainly based on the resale potential of the secured property and the repayment structure of the mortgage. Learn more about how no doc mortgages work and about the lending standards today.

How No Documentation (No Doc) Mortgages Work

A no documentation mortgage is a loan to buy a home that does not require the income documents required by a typical mortgage. These loans are considered higher risk.

Typically, you must submit proof of income to qualify for a mortgage. Required documentation may include W2s, pay stubs, employment letters, and/or recent tax returns. Lenders want to see that you can afford payments on the loan, so they want proof you have a stable and reliable source of income.

Some mortgages, however, don't require any proof of income. These are called no documentation (no doc) mortgages, no documentation loans, or no income verification mortgages. With these loans, borrowers aren't required to provide a lot of paperwork, like the docs mentioned above. Instead, they may only have to provide a declaration that indicates they are able to repay the loan. These mortgages are commonly granted to people who don't have a regular income source, self-employed individuals, new immigrants, or temporary workers.

No documentation (no doc) mortgages do not meet the Consumer Credit Protection Act requirement to reasonably verify the borrower’s financials. Because they don't require income verification, these mortgages tend to be very risky. And they tend to be increasingly rare since the 2010 passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires documentation on all types of loans—especially mortgages.

Passed in the wake of the financial crisis of 2008, the Dodd-Frank Wall Street Reform and Consumer Protection Act instituted reforms and changes to the banking/financial industry, many of which focused on the lending business. Subprime mortgages and other high-risk loan products—notorious for their high levels of default—were considered among the main culprits of the crisis, which triggered the two-year Great Recession.

No Doc Mortgages Since 2010

In a sense, true no doc mortgages no longer exist. Now, no lender will rely just on your word that you can repay the loan, as they did in the housing market boom of the early 2000s. This practice is illegal. Lenders must verify the information you provide using some kind of documentation.

However, mortgage lenders can still ease their requirements regarding income documentation in other ways. Borrowers can still find loans that do not require tax returns or other traditional income-verifying documents. Instead, the lender allows you use other items, such as bank statements or brokerage statements, to show that you can meet your mortgage payments.

Special Considerations

No doc mortgages are commonly granted to individuals who don't have a regular source of income, including those who are self-employed, or whose wealth stems from investments or unearned-income sources. They help house flippers and landlords with multiple expense write-offs on their tax returns to buy investment properties without thoroughly documenting their income.

But lenders granting these loans require borrowers to have excellent credit scores and high cash reserves available to make large down payments. The verification of a borrowers’ employment merely states monthly gross income on the application. 

Down payment requirements are also different when it comes to these mortgages. At least a 30% down payment is required, while other mortgages may be as much as 35% to 50%. In comparison, most conventional mortgages require a 20% down payment. Such mortgages also have a maximum 70 loan-to-value ratio (LTV). This ratio is calculated as the amount of the mortgage lien divided by the appraised value of the property, expressed as a percentage. 

The higher the borrower’s down payment on the investment property, the easier it is to be approved for the loan. This business model holds true for many mortgages because lenders see that the borrower is willing to offer a significant amount of capital. This large lump-sum payment may mean there is less likelihood that the borrower will default because of their considerable investment. 

Types of No Document Mortgages

No doc mortgages fall into the Alt-A category of lending products. They are considered as falling in between prime and subprime mortgages in terms of risk.

Other types of Alt-A loans include:

• Low documentation loans (low doc): require minimal information on borrowers. Lenders often extended these loans purely on their client's credit scores.
• Stated-income, verified-assets loans (SIVA): lenders accept your assets as the basis for approval. They’re often called “bank statement loans.”
• No-income, verified-assets loans (NIVA): similar to SIVA loans, except income is not part of the equation (or the application).
• No income-no asset (NINA): do not require the borrower to disclose income or assets as part of loan calculations. However, the lender does verify the borrower's employment status before issuing the loan.
• Stated income-stated asset loans (SISA): allow the borrower to state their income and assets without verification by the lender. These products are also known as liar loans.
• NINJA loans: credit extended to a borrower with no income, no job, and no assets. Prevalent pre-Dodd Frank, this type is nearly extinct now, given that it ignores the verification process.

The interest rates for no documentation and other Alt-A products are usually higher than rates for a traditional mortgage loan. Many of these limited documentation loans take their security basis from the equity position in a property.

A mortgage calculator can be a good resource to help you budget for the monthly cost of your payment. 

The Bottom Line

These days, lenders must require some documentation to support the information you provide them. In the past "no doc" loans allowed them to provide funds to borrowers who simply declared their income without providing proof. Some lenders today may have looser lending practices than others, but when they provide funds to borrowers without thoroughly vetting their finances, they are assuming a risk.