The “No Doc” Mortgage

“Go down to the pool hall on the corner of 4th and 8th and ask for a guy named Vinny-The-Chin.  Tell ‘em Vito sent ya and he’ll loan ya the money no questions asked”, says a shady character with a raspy voice.  The ‘no questions asked’ aspect of such a transaction could technically qualify it as a No Documentation loan (also referred to as “No Doc”), but of course, if you don’t make the payments, then your arms will be broken or you’ll find yourself attempting to swim with cement shoes.  In this article, we’ll discuss another type of “No Doc” loan that’s been quite popular in the mortgage business.  It’s a little different than the Vinny-The-Chin loan.  If you don’t make the payments then you won’t lose your life – you will however lose your house and your credit rating.  But don’t make your decision about the virtues (or lack thereof) of the “No Doc” loan just yet.  There are certainly some individuals who are a perfect match for this loan type.  In the next few paragraphs, you will learn who they are and who they are not.

Before we begin, please allow me to preface my comments about who is right and who is wrong for the “No Doc” loan, by discussing right and wrong.  For the most part, the loan programs themselves are not wrong (Vinny-The-Chin loan excluded).  Things (in and of themselves) are not wrong.  For example, a gun or morphine is neither right nor wrong.  A gun in the hand of a law enforcement officer might save a life, while a gun in the hand of a criminal serves an entirely different purpose.  Morphine in the hand of a surgeon can save a life, but morphine in the hand of a drug addict spells destruction.  The proliferation of mortgage loan programs that have, in part, been responsible for the tremendous run-up in real estate values are not wrong.  It is the misuse of these programs that has a damaging effect. 

Ladies and Gentlemen, this author will now tip his hand and share with you that he is a fan of the “No Doc” loan.  The “No Doc” loan does not consider income, or the source of the income, on the loan application.  The “No Doc” loan does not require documentation of any assets.  The “No Doc” loan is a function of the borrower’s credit score and down payment, and with a satisfactory credit score, the “No Doc” loan comes with zero down.  The “No Doc” loan is the closest the mortgage business will ever get to doing business the old fashioned way, a signature and a handshake.  The “No Doc” loan is ideal for the newly self-employed or for borrowers who do not want to disclose their sources of income or assets.  And as if this wasn’t enough, the “No Doc” loan also comes with a low interest rate.

I’m sure all of this sounds great, and it is – so what’s the downside to the “No Doc” loan?  The answer is one of suitability.  The lack of underwriting requirements for a “No Doc” loan make it possible for someone to purchase a home that may be hundreds of thousands of dollars more than he/she can realistically afford.  The underwriter is allowing you, the borrower, to decide how much of a mortgage payment you can afford, then accepting your answer and closing the loan.  Yes, you may find yourself sitting in a million dollar home, but if you could only afford a $1,000 a month mortgage payment then you are not going to be there long.  This is a problem that exists in the mortgage industry today.  Some Loan Officers, who put making money ahead of all else, have encouraged borrowers to get in over their head.  Borrowers too, are not without blame, as some have gambled that their home would increase in value in a short time, hoping they could cash out with a hefty profit.  The real estate market has now changed and sadly many are stuck with mortgage payments that they can’t afford and a home that they can’t sell.

So, if you have the opportunity to take advantage of a “No Doc” loan and it suits your needs, consider it carefully.  Your personal finances will dictate how to proceed.  If little difficulty presents itself, purse it.  Otherwise, seek more conventional loans.