No Documentation and Nonincome Verification Loans

Conforming loans generally require strict proof of income, assets, and other debts. If, for example, you cannot prove income to a lender, whether it is because you are self-employed for a short time or

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Using a first and second mortgage in lieu of one larger loan may not make sense until you do the numbers. Surely, a second mortgage loan as described here will carry a higher interest rate because of the lender's increased risk of being in second position. Make sure the "blended" interest rate between the first and second mortgages does not exceed what you otherwise would be paying with a larger, single first mortgage loan. Also, keep in mind that a larger first mortgage loan may also mean you are paying private mortgage insurance, so that must be factored into the monthly payment.

How to Calculate a Blended Interest Rate

Multiply each interest rate times the amount it relates to the total debt, then add them together. For example, if you have an $80,000 first mortgage loan at 8%, and a $20,000 second mortgage loan at 10%, the blended rate is (8% x .8) + (10% x .2) = 8.4%.

can't otherwise prove income, there are nonincome verification (NIV) loans.

NIV loans (also known as "stated income" loans) require less documentation than traditional loans. Lenders often advertise these programs as "no doc" loans, meaning the borrower does not have to come up with any documentation other than a credit report and a loan application.

Some loans are called "no ratio" loans, in that you don't have to justify your total debt (mortgages plus other continuing obligations, such as car loans and student loans) compared to your income.

Few, if any loans are true "no documentation" loans. Most of these offered programs are bait and switch tactics: The lender says they don't need documentation, but when the loan is being processed, the lender will ask for more and more documentation. Often, the lender will see some red flags that trigger the additional inquiry.

The best defense to these tactics is a good offense; speak to your lender or mortgage broker up front. Identify documentation issues up front, educate the lender about your finances, and be truthful. The more a lender suspects you are hiding something, the more documentation the lender will ask for.

Here is a real-world example: Carteret Mortgage, <>, lists the following general guidelines for one of its no-ratio mortgage loans:

• Minimum middle credit score must be 640.

• Five credit accounts are required; three may be from alternative sources—utility, auto insurance, etc.

• Bankruptcy and foreclosures must be discharged for three years with reestablished credit.

• Two years' employment with same employer.

• Two months' PITI reserves are required with an LTV less than 80 percent. Six months' reserves are required otherwise.

• 10 percent minimum down payment is required from your own funds. No gifts.

You should ask for this kind of information up front from your mortgage broker or lender. The more information you know about what a lender needs, the more information you can provide.

Watch What You Say on NIV Loans

Just because you don't have to provide documentation of your income to the lender, it doesn't mean you have a license to lie. Most lenders will make you sign an authorization to release federal income tax returns. They may not check now, but if your loan goes into default, they may obtain copies of your tax returns. If the income you report on your loan application is way out of sync with your tax returns, you may be answering to loan fraud charges.

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