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With low-doc and no-doc mortgages,
you pay a little more, say a lot less

No-income-verification loansMemo to self-employed masons and self-made millionaires: there's no need to panic when it comes to buying a home.

Lenders want to make a buck from anyone they can, including people who either can't document a steady income stream or choose not to for the sake of privacy or simplicity. In that spirit, many offer tailored mortgages that don't require borrowers to produce forms showing how rich they are.

And today, they're easier than ever to apply for and obtain.

"I have like 100 programs, so I can just about do anything," says Deborah M. Myers, a senior loan officer in CrossLand Mortgage Corp.'s Tampa, Fla., branch. "I have the ability to actually underwrite the loan on my laptop, and for some self-employed people, the computer doesn't even ask for tax returns.

"It's amazing how little information is required."

One of many mortgages designed for people with special needs, no-income verification loans and their brethren allow borrowers to forego the time and effort of culling tax records, bank statements, brokerage reports and other forms for their lenders.

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How they work
Some of these "low-doc" or "no-doc" mortgages allow customers to simply "state" their income by filling in a blank on the application. Others go so far as to not require any information about income, assets or even credit. Each step down the ladder requires the borrower to put either more money down or accept a higher interest rate. Yet the penalties aren't as harsh as they once were and the application process is much less painful than before.

"You don't have to offer your firstborn as collateral anymore," says Tim Coffman, president of Northern Lakes Mortgage Corp. in Hudson, Ohio. "The rates, they don't with every little thing give you a markup, and finally, very recently in the last two to three years, they have finally allowed your credit to carry you. The higher score, the more desirable you are.

"Now, it's very much more relaxed," he adds.

So who might want to look into low-doc products? Surprisingly, lenders say, a wide range of people. Self-employed businessmen and women who don't have the two-year track record required for conventional loans may need them. Active stock traders who don't want to share their financial history and complicated tax returns with a lender fall into this category as well.

Skirting the conventional rules
Then there are more complicated situations, according to Coffman. Say a landlord owns an apartment building that generates a certain amount of rental income. A bank's underwriting guidelines might say that, no matter what, 50 percent of a landlord borrower's income can't be used to qualify for a mortgage because it's assumed that money goes toward maintenance. If the landlord acts as his own handyman, however, he might spend only 30 percent of that money for upkeep. But the bank's underwriting standards don't make exceptions, so he's out of luck.

"Somebody that has a very, very complicated financial situation who does not want to verify their income ... this is a really easy way for them to document the file," says James W. Kemish, president of Power Mortgage Corp. in Delray Beach, Fla.

"Some people in this area are intensely private," he adds. "You've got people who make a living investing in the stock market, trading stocks or day trading. Their financial profile is so complex they simply would never consider applying for a regular Fannie Mae loan."

The more secrecy, the higher the cost
The cost of avoiding the financial microscope depends on the degree of secrecy or leniency a borrower needs. A stated-income loan that still involves verification of assets, for example, might not have a much higher rate or stricter qualifying standards than its conventional counterpart. The most lenient low-doc mortgages, on the other hand, would.

"The true 'no-doc' is the ultimate of the easy loan products," Kemish says. "You do not state income, you do not state employment, you do not state assets, you give no bank accounts or bank account numbers, no bank balances, you don't have to source the funds for your down payment and ... you don't even have to say that you have a job."

The interest rate premium for a basic no-income-verification loan starts at about three-eighths of a percentage point on average, he says, while the full no-doc loan would have a rate about 1 percentage point higher than a conventional mortgage with a comparable term. Since a 30-year fixed rate loan with no points went for about 7.625 or 7.75 in mid-June, that means somebody would have had to pay interest at a rate as high as 8.75 percent to get the most lenient mortgage.

The maximum allowable loan-to-value ratio, meanwhile, often depends on a person's credit, or "FICO," score. While a score of 620 is considered decent and 660 is very good, for example, someone would need a 700 or better to get a 90 percent loan-to-value no-income-verification loan at CrossLand, according to Myers, the Tampa loan officer.

Lenders leery of big leaps
The amount of "payment shock" involved could impact the amount a person can borrow, too. The term refers to the difference between someone's current housing payment and the anticipated principal, interest, taxes and insurance payment a new mortgage would require. So, while Power Mortgage offers a no-doc mortgage with a loan-to-value ratio of as much as 95 percent, a borrower who would have to go from paying $1,100 a month in rent to paying $3,200 for a new home wouldn't qualify.

Because there are many variations on these types of loans, experts say consumers may want to use brokers rather than lenders when shopping for no-income-verification mortgages. That's because mortgage brokers can sift through several available options and find a program that meets specific asset or income requirements. Some lenders such as CrossLand also can search alternative financing channels to find good deals.

Regardless of how they proceed, however, borrowers should make sure their needs are worth the cost of getting a low-doc mortgage.

-- Posted: June 24, 1999
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