Solving Verification Problems with
Alternative Documentation Loans
they work for you?
Skip the Paper Chase
Some loan programs allow the lender to skip time-consuming steps such as writing
verification letters to employers, creditors or banks. These alternative loans
minimize delays and the aggravation factor. And if you're prepared to make a larger
down payment, ask lenders about loans that require only minimal information if
your down payment is 20 percent or more.
Are You Self-Employed?
Verifying your income can be tough if you run your
own business and write off a lot of business expenses against your income taxes.
Even if you make a lot of money, verification can be a real hassle because it's
harder to demonstrate your gross income. On a standard loan application, you're
stuck with going through your IRS returns for the last two to three years.
a Loan for You
A No-Documentation or Low-Documentation
Loan can greatly reduce the paperwork and scrutiny, especially for self-employed
people prepared to make a sizable down payment. No-Doc and Low-Doc loans work
around the problem of proving gross income to the lender by reducing the verification
requirements. And you don't necessarily have to be self-employed to qualify.
What's the prescription for no paperwork?
depends on which lender you talk to. In a No-Doc loan of the purest form, there
would be no verification of income, employment or assets. No paper chase-no hunting
down of pay stubs, W-2s or tax returns. In a Low-Doc loan, at least one of the
factors-income, employment or assets-will be verified but the overall paperwork
is significantly less than a standard loan application. Asset verification, for
example, might require you to provide bank statements to show you can make a down
What's the Catch?
You knew there had to be one.
The price for these quicker-to-obtain,
nearly paper-less loans is typically a down payment of at least 20-25 percent.
And you will pay a slightly higher interest rate, too, about 1/8 to 1/4 percent
above the market for standard loans. To figure the extra cost, remember your monthly
payment will be 2 1/2 percent higher for every 1/4 percent you add to your interest
rate. Thus, the difference in a monthly mortgage payment for a $200,000 loan at
7.25 percent interest vs. 7 percent would be $33.75 per month.
to Down Payments It's the next big step.
Income and Employment--the next step in the equation.
Down Payment Hurdle It's a Big Deal.
payment plays a major role in qualifying for your loan. The amount you put down
affects how much you can borrow, and it determines the size of your monthly mortgage
payments. From a lender's perspective, the more money you put down the better
because it reduces their risk of foreclosure. From your perspective, a 20% down
payment means you'll borrow less, pay less interest over the life of the loan,
and get a lower monthly payment. Unfortunately, nothing puts a bigger dent in
your home-buying budget than the down payment. It could squeeze the amount of
cash you need for home improvements, moving expenses and other costs.
Let It Scare You Away Fortunately, there's hope.
your lender about your friends Fannie Mae and Uncle Sam. Fannie Mae, the major
secondary mortgage company, makes loans available through local lenders with as
little as 3 percent down. The Fannie Community Home Buyer's Program has various
plans that allow family members to gift or loan the funds necessary for the down
payment. Another mortgage lets you put 5% down and pay interest only for the first
year, so you get to deduct the entire monthly payment from your taxes. Check with
your local lender. FHA-insured loans require a maximum of 3% down, if you meet
the program's guidelines. Zero down-payment loans are available from the VA for
veterans and active military personnel.
Remember that everything in the sales
contract is negotiable. You can ask the seller to cover points and closing costs,
leaving you more cash to cover the down payment. Most mortgage lenders let sellers
pay discount points, loan origination fees, and settlement costs up to at least
3 percent of the home's value.
Get a Loan Repay other
If you have assets you can borrow against, you
can use a loan to meet your cash requirements. The loan must be secured and the
repayment of the borrowed funds will be counted in your debt ratio, which of course
affects how much you'll qualify for on your home loan.
Out Nonprofit Housing GroupsThey have special programs.
National Association of Housing Partnerships (NAHP), a nonprofit organization
offers a no-down payment loan where you'll pay only half a percentage of the loan
value at closing. The Nehemiah Progressive Housing Development Corp. makes a gift
of the down payment but you must come up with 1 percent of the purchase price
for certain items such as the appraisal fee, credit report and hazard insurance.
The Nehemiah loan is only available as a Federal Housing Administration (FHA) loan (but it receives no government subsidies).
Check with FHA or local lenders for income guidelines on these programs.
With Your Employer It may be a benefit.
offer payment of closing costs as an employee benefit.
If It's Not Enough?
Dealing with Insufficient Income...
6 of 9