No Doc Home Equity Loans: Reviewing the Downside

No doc home equity loans are limited and not offered by a lot of lenders. The need for documentation in order to verify a person’s income and assets for many lenders and required for most every loan. For the few lenders that permit a borrower to borrow against their home equity line of credit without documentation, the criterion set is based on the lender’s relationship with the borrower. This includes those borrowers who have an excellent credit rating and do not have a history of late payments or other financial difficulties.

Applying for a no doc home equity loan may be advantageous to some qualified borrowers who would like to avoid the hassle of providing detailed financial statements or tax returns as part of the loan verification process. These types of loans can be easy to accomplish, either online or over the phone and be approved quickly. They may also have some downside risk to them for both the lender and the borrower.

Default Risk

Lenders that provide no doc home equity loans run the risk of loan default if the information provided by the borrower does not accurately portray their current financial situation. Lenders that rely solely on a borrower’s statements regarding income, assets and other important financial information needed to underwrite the loan are taking a chance that these representations by the borrower are accurate and true. If they prove to be untrue later on, the lender may have limited recourse to recall the no doc home equity loan.

Higher Interest Rates

Borrowers may have to pay a higher interest rate for no doc home equity loan in comparison with other types of home equity loans. This higher interest rate is the trade off for not having to provide financial disclosure information regarding credit, income or other financial information. For some borrowers this will result in extra hundreds of dollars in loan interest costs per year and may not necessarily be worth it.

Fraud Concerns

Borrowers that use no doc home equity loans may also be subject to fraud concerns with respect to ant misrepresentations that are made on the application in order to obtain the loan. Where such misrepresentations were intentional and material to the overall decision of the lender to provide the loan, this constitutes fraud and may subject the borrower to criminal prosecution.

Lenders and borrowers both should consider the risks associated with offering no doc home equity loans and act accordingly. Providing these loans to the best customers of the lenders with outstanding reputations and payment histories may be good business for the lender. Providing these types of loans as a general rule could create peril for both the lender and the borrower.