Insider Tip: Low or No Doc Mortgage

Sometimes taking a "Low" or No Doc mortgage makes sense even if you are able to provide full income documentation. Stated income or no income verification can allow more non-traditional income count towards qualifying for a mortgage. Suppose the amount you want to borrow would cause you to have a payment that would give you a Debt To Income (DTI) ratio above the standard allowable 36%. If you choose to use a No Doc option you could claim a higher income, thereby reducing your DTI. Since No Doc loans carry higher interest rates your payments will be higher and so will your actual DTI. Example: Your actual income is $2000 per month, and you've found a Full Doc loan with a payment of $750 per month. This would give you a DTI ratio of $750/$2000 = 37.5%, which is above the normal limit. If you were to do a No Doc loan instead and claim an income of $2500 per month you would reduce your DTI to below 36%, as long as the rate increase did not make the monthly payment exceed 36% of $2500, or $900. Your actual DTI would be $900/$2000 = 45% (or less if the payment is lower). Using this strategy you can borrow more money than you would otherwise be able to. However, you will pay more every month. Mortgage lenders are not blind to the fact that this is going on, and they charge a steep premium for No Doc loans (which they sometimes call Liar's Loans). The maximum LTV is also normally restricted to 80-90%, and often property types such as investment are not eligible. Specifics vary by lender.