Unless you’re fortunate to purchase your house in cash, at some point, you’ll probably have to jump through a few hoops to qualify for a mortgage. For many people, the mortgage verification process isn’t necessarily bad, but it’s a bit tedious. If you’re a self-employed borrower or someone with income fluctuations, however, qualifying for a mortgage could be a challenge.
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Income verification requirements
When you apply for a mortgage, your lender will generally require you to provide proof of income. Lenders review this proof to confirm that you can afford to make the payments on your new loan.
To make sure the income listed on your loan application checks out, here are some of the types of documentation your loan officer might request:
- Pay stubs (last 30 days)
- W-2 forms (last two years)
- Bank statements (two most recent)
- Tax returns (last two years)
The requirements might sound fair enough, but they don’t work for everyone. Self-employed borrowers and those who earn commission-based salaries don’t always have consistent weekly or monthly income. You might actually earn enough money to afford the loan you’re seeking, but if you can’t prove that income in a way the lender accepts, you could be out of luck.
No-income-verification mortgages tried to solve this problem.
What are no-income-verification loans?
A no-income-verification loan is a type of mortgage that doesn’t require borrowers to provide documentation of income. These loans, also known as “no-doc” and “stated income mortgages,” offers a solution to borrowers who couldn’t satisfy traditional mortgage requirements.
Unfortunately, these loans eventually became a source of large-scale abuse. They were called “liar loans” after millions of consumers used them to get subprime mortgages they couldn’t afford in the long term.
Olan Carder, senior mortgage planner with Fairway Independent Mortgage, worked in the mortgage industry during the height of the housing boom. He experienced firsthand the rise of the no-doc loan and the subsequent market crash.
“Around 2007, at the height of the market, you could get NINA loans (no income, no assets), which were basically signature loans,” Carder said. “The train went off the tracks with NINA loans. It got to where you could have bad credit, you could have no income — anyone could get a loan for almost anything.”
Are no-doc-mortgage loans still available?
In the early to mid-2000s, no-income mortgages grew popular. At the time, it wasn’t uncommon for self-employed borrowers to turn to no-income-verification loans as an alternative way to qualify for a home loan.
Ultimately, these subprime loans backfired and largely contributed to a sharp rise in foreclosures and the eventual financial crisis. Lenders today rarely offer no-doc mortgages.
Because the once easy availability of no-doc loans turned out to be disastrous, you may wonder why lenders ever agreed to issue such risky financing in the first place.
“The big assumption then, and the reason it kind of worked for lenders for a while, was the idea that the value of the house would increase,” Tendayi Kapfidze, chief economist at LendingTree, said. “The lender was protected if the buyer didn’t pay because they could foreclose on the home. The underlying assumption was home price appreciation.”
That assumption, Kapfidze added, proved to be off the mark. “The home crisis obviously proved that home prices don’t always go in one direction forever,” he said.
Why income-verification loans became so rare
Income-verification loans became rare largely because of regulation passed after the housing crash.
The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 put strict requirements on banks and lenders to curb predatory lending. Lenders were required to verify a borrower’s ability to repay a loan before any new mortgages could be issued.
The Consumer Financial Protection Bureau also issued a rule in 2013 regarding “qualified mortgages.” According to the CFPB, lenders were required “to make a reasonable, good-faith effort to determine that a consumer can repay a loan based on their documented income, assets, debts and some other common factors.”
While protecting consumers from predatory lending practices was a good move in theory, many believed the new regulations were an overcorrection.
In 2018, Congress rolled back certain provisions of Dodd-Frank. Some lenders could once again lend to borrowers who were unable to satisfy strict income-verification requirements (as the banks keep the mortgages in-house instead of selling them).
Qualifying for a mortgage while self-employed
Despite the rollback on mortgage regulations, no-doc loans remain uncommon. However, self-employed borrowers may be able to take advantage of a newer product known as an “alternate documentation” loan.
A number of lenders offer “bank statement” loans to self-employed borrowers (or those with similar income-verification challenges). Yet there’s a difference between alternate documentation loans and the no-doc loans of the past.
With an alternate-doc loan, a borrower’s income is still verified, but in a different way. For example, a borrower might be required to demonstrate the ability to repay by disclosing 12 months of business and personal bank statements.
Do your research
Regardless of the type of mortgage you ultimately decide upon, it’s wise to research and compare loan products before you sign on the dotted line. If you’re considering a non-traditional mortgage, this is especially true.
“Shop around and talk to different lenders,” LendingTree’s Kapfidze said. “There’s a lot of competition among mortgage lenders because the volume has gone down. There’s probably a lender out there who will work with your particular circumstance.”
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