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While conventional mortgages are the norm, some people prefer to take the unconventional route of a no doc loan in getting a mortgage.  What a no doc loan means is that none of the typical documents (documents of income and assets, such as paychecks) are not verified as part of the process.  The borrower, in such a circumstance, pays a higher premium and down payment than he normally would.  In effect, the borrower is paying for privacy.  No-doc loans are classified in the mortgage industry as “Alt-A” loans, meaning that they are a riskier alternative to A-paper (or “prime”) loans, but not as risky as subprime loans.

There are a couple conditions under which this can be considered advantageous.  The borrower could be self-employed and have an income that is so irregular that he would otherwise be ineligible for a conventional mortgage.  Or, the borrower might be unemployed, but have excellent credit and the ability to pay the loan back very easily.  Another example would be a businessperson who is moving his business from one community to another, and does not currently have any income to show at the moment.  Or perhaps the borrower simply needs a loan so large that is only accessible through a no doc mortgage.

No doc loans began increasing in popularity in the early 2000’s and peaked during 2006.  But now that lending practices are more regulated they are a little harder to come by.  Alt-A and subprime loans were given a large part of the blame for the recent mortgage crisis, but in the current environment of economic change, we may see them returning.  There is a strong demand by the self-employed for the return of the no-doc loan, as it is frequently the only loan that they can qualify for.

This Financial Services article was written by Mark Karavan on 10/23/2009

No Doc mortgages and No Doc Loans