No-Doc Loans - Buying a House Without a Job

By Steve Gillman - 2006

The "no doc" in no-doc loans is short for "no documentation." The mortgage lender may not require any documentation of income or employment for these types of loans. This doesn't quite mean no documents at all will be required, and in fact, it can mean different things to different banks.

For example, when we got the loan on the house we are in now, we didn't have jobs. We couldn't provide evidence of a decent income, so the lender made it clear that we shouldn't even mention what our reported income was for the previous year. Our new business was becoming very profitable in recent months, but our last tax return would have shown an income too low to qualify us for anything.

We had to have a loan based on credit scores. Since my wife and I have always paid everything on time and had good scores, this was easy. However, we did have to document when we started our business, and the usual appraisal of the home we were buying was needed. "No doc" obviously doesn't mean no documents, but rather limited documentation requirements.

Actually, many such loans are referred to as "no income verification" loans. You may still need to verify that you have a job or a business, but not how much income it provides. These types of loans may be called "partial documentation loans," or "low documentation loans," as well. Some may require that you state your income without proof. These are sometimes called "stated income" loans.

Why Consider No-Doc Loans?

Our loan cost us 7.25% when the typical 30-year mortgage loan was charging 6% interest - typical of no-doc loans. A higher interest rate is a given, because these loans are considered a higher risk. I know a woman who obtained a no-doc loan at 11% annual interest while 6% was normal for conventional loans. Why, then, would you want such a loan?

The simple answer: because you have no better option. For example, we had money in the bank and a growing business, but the business had just started to really take off, and we couldn't show income sufficient for any loan from our last tax return. We had good credit scores, however, so if we wanted to buy a house, we had to rely on those alone.

Maybe you have a great job, but were unemployed last year, so you face a similar situation. Or consider that although getting a better job seems great to you, to a lender, if the job is too new and in another field than your previous job, it shows an inconsistent employment history. In other words, you might have to rely on your credit score to get that mortgage loan.

When you get a no-doc loan, credit score matters - a lot. Our 7.25% rate seemed high until compared with that 11% loan I saw - one has to wonder what her credit score was.

Consider the future when looking at these loans. If we were within a month or two of filing the next years tax return, for example, we could have waited to buy a house with a regular mortgage loan at 6%. You can also look at a no-doc loan as temporary. Once you have documented income from a business, or enough time on the job, or have otherwise corrected whatever the problem is, you can get a new loan. If I had an 11% mortgage loan when 6% was available, I would certainly hope that it was temporary.

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