In today’s marketplace, there are many borrowers who do not fit the traditional mold, especially in terms of their employment, i.e. commission salespeople, self-employed earners, investors, etc. Understanding this fact, the mortgage industry has adapted by creating programs known as no-documentation loans where borrowers qualify on the basis of their credit history without the need to document income and assets. Below are some pros and cons to think about if you fall into this category:
1. Simple Underwriting
If this is the only loan you will qualify for, there is at least some good news. Because you are not proving anything, there is not much for you to do. Your lender will review your credit history to make sure you qualify. Then, the underwriter will take a close look at the residential home appraisal and your credit profile. If those two things check out, you are usually clear to close.
1. Higher Interest Rates
Since you are not proving your ability to repay the loan, you can expect to pay much higher interest rates than a typical borrower. Whenever you present a high risk to your lender, you will have to pay more.
2. Larger Down Payment/Less Access to Equity
The more you borrow against your home’s value, the riskier you are to your lender. When purchasing a home under this program, you are going to need a considerable down payment, and when refinancing, you will have less access to your equity.
Although there seems to be more drawbacks than positives to loans like this, they are still your best option if you cannot prove your income and assets. Consider the alternatives and take one if you really need it. Then, start planning on how you can refinance in a few years under better circumstances.