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Alternative documentation loans: A mortgage solution for the self-employed.



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Alternative documentation mortgages come in many guises. Most "alt-doc" loans are stated income or no income verification (NIV) loans. Others are stated asset loans or no asset verification (NAV). And those borrowers who have a particularly strong application, with a big down payment and great credit can opt for a NINA loan--no income, no asset verification. And finally, there is the NINJA loan--no income, no job or assets.

Underwriting for these loans differs from lender to lender. Often assets and credit are used to extrapolate the borrowers' income--for example, a common underwriting requirement is that the borrower must have liquid assets totaling at least six times the stated monthly income. So an applicant claiming to make $10,000 a month should have at least $60,000 in the bank. Other underwriters might request bank statements and evaluate applicants' incomes using the amount of money moving through their accounts.

Typically, underwriting requirements are determined by the strength of the applicant's credit and the amount of down payment or equity. If an application doesn't make sense, for example if a cab driver states an income of $20,000 a month and can only put 5% down, the lender may require full documentation. Lenders today are giving NIV and NAV loans much more scrutiny than in the past, as the recent spike in mortgage defaults has shown that many borrowers used these loans to overstate their incomes and buy more home than they could afford. Most lenders will no longer allow W-2 employees to state their income. W-2 income is so easy to document there isn't much reason to do an alt-doc loan--unless the purpose is to overstate the income.

Disadvantages: The main disadvantage is that these loans are subject to misuse. The purpose of alternative documentation should be to have all income and assets counted, even if it's hard to prove. The loans can backfire when borrowers exaggerate their income or assets to purchase more than they can reasonably afford. There's a reason that the real estate industry nickname for these products is "liars' loans."

Advantages: The chief advantage is that borrowers who have difficulty documenting their income can still get a mortgage. Examples of those who might benefit from alt doc loans are self-employed borrowers who might have a lot more cash flow than taxable income. Those with newer businesses might show losses on previous tax returns and with a full documentation loan the current income would have to be averaged in with the previous losses, reducing the loan amount the borrower could qualify for. Other applicants just have such complicated finances that it is just easier to go with an alt-doc loan. No asset verification loans are used when a borrower's down payment or other funds haven't been "seasoned" or are hard to verify. "Seasoning" requirements mean that the assets have to have been in the borrower's possession for a minimum length of time, usually 3 to 6 months. If an applicant got the down payment by selling something like a horse or a stamp collection the week before buying the house, for example, proving that could be difficult--underwriters might want an appraisal of the items sold, receipts, canceled checks, etc. No asset verification requirements just make it much easier to get fast approval and complete the transaction.
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