No doc loans are ones in which the borrower is not required to provide documentation of his income or assets. No doc loans are also referred to as "easy" loans, or stated loans.
No doc loans are commonly used for self-employed persons, or for bartenders, waiters, hair stylists or others who receive a large portion of their income in the form of cash tips which cannot be verified. For example, a self-employed person may have a corporation and, instead of receiving a regular paycheck, the person borrows money from the corporation for his income. While he or she is obviously receiving money from the corporation, his or her personal income tax returns may show little or no W-2 income.
Lenders who issue no doc loans are taking a greater risk with the borrower, so it's natural that the lenders will pass on this additional risk by requiring a larger down payment on a mortgage.
Lenders will also typically charge higher interest rates than they would for a buyer whose income can be verified. The rates may be a half a percentage point to a full percentage higher than those for fully documented loans.
Borrowers using no doc loans will typically be required to have better credit scores than documented borrowers.
There are a few different types of no doc loans. A Stated Income loan is one in which the borrower states his income on the mortgage application, but does not provide documentation of that income. A Stated Asset loan is one in which the borrower states his assets, but again provides no documentation. No Income/No Asset loans are ones in which the income and assets are neither stated by the borrower, or documented.
While no doc loans are the only choice for certain borrowers, it is more cost-effective to pursue a documented loan if at all possible.
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