The Disadvantages of No Doc Home Loans

As someone that is looking for a new mortgage, no doc home loans can present you with an interesting option. The very name suggests that you will have no documentation of certain things. Most of the time, this means that they will not be verifying your income or how much money you have in savings. There is fewer paperwork and is therefore quicker to get approved for. The fact that you do not have to have your income verified is very enticing and can be beneficial for those that are self-employed. While there are some enticing things about a no doc home loan, they are not without their drawbacks. Here are a few of the common disadvantages of no doc home loans and what you should be aware of.

Higher Interest


When you go out into the mortgage market and start shopping, one of the primary things that you will look at is the interest rate. If you are self-employed, you may be swayed into going with a no doc home loan so that you can be approved. Some lenders are afraid to give a self-employed person a loan because of the random nature of their income. However, with a no doc home loan, you can avoid this problem.

When a bank agrees to offer you a no doc home loan, they are essentially taking a big risk. From their perspective, they have no idea how much money that you really make. You simply fill in the amount that you want them to believe that you make on a form. If you tell them that you make $200,000 per year, they have to believe you, even if you only make $50,000 per year. They are taking a leap of faith based on your word.

In return for this leap of faith on their part, they want to be well compensated for it. One of the first rules of investment tells us that when you take on higher risk, you also take on a higher potential reward. Therefore, the bank is taking a higher-than-normal risk by offering you a loan and they want to get a higher return than they normally would command. This will result in you paying more money over the life of your loan and making a higher monthly payment as well.

Overextension


Mortgage lenders have entire departments within them that are in charge of approving mortgage loans. They crunch the numbers and have several complicated ratios that help them decide how much house that you can buy. These formulas are based on years of first-hand experience and knowledge from writing thousands of mortgages.

When you take out a no doc home loan, you are essentially throwing these ratios out the window. You are telling the bank that you know more about finance than they do. Sometimes, you might be right and you afford the monthly payment easily. Other times, you overextend yourself and end up in over your head. Before you take out a no doc home loan, consider exactly how much you can afford on a house payment.