Jumping the financial hurdles.
Solving Verification Problems with Alternative Documentation Loans
Consider these-will 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.
Here's 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 Up Doc?
What's the prescription for no paperwork?
That 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 payment.
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.
On to Down Payments It's the next big step.
Down Payment, Income and Employment--the next step in the equation.
The Down Payment Hurdle It's a Big Deal.
A down 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.
Don't Let It Scare You Away Fortunately, there's hope.
Ask 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.
Negotiate With the Seller
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 debts.
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.
Check Out Nonprofit Housing GroupsThey have special programs.
The 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.
Check With Your Employer It may be a benefit.
Some companies offer payment of closing costs as an employee benefit.
What If It's Not Enough?
Dealing with Insufficient Income...
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