What Is a No Income Verification Loan?
As you can probably guess from the name, you don’t need to show income to qualify for a Mortgage loan with No Income Verification Loan. No tax returns are needed. No W-2s. No employment verification of any kind. Here’s what you need to know about this unique home financing option.
How does a No Income Verification Loan work?
A No Income Verification Loan, popular among borrowers who have faced rejection with conventional mortgage loans, employs distinct approval criteria. Rather than looking at employment documentation, mortgage professionals consider the overall solvency of the borrower. Liquid assets and credit scores are the key factors in approving a No Income Verification Loan, which can be used to:
- Buy a home. Almost any property you can purchase with a conventional loan, you can do so with a No Income Verification Loan. This includes owner-occupied and second homes, single-family residences, condos, and one- to four-unit properties.
- Refinance. It’s a popular option when interest rates fall. With a No Income Verification Loan, a borrower may go as high as 75% of the home’s value when refinancing their mortgage loan.
- Take cash out. Would you like to access your home’s equity to pay for home improvements? Invest? Pay off high-interest debts? You can do it with a No Income Verification Loan.
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How do you qualify for a No Income Verification Loan?
By proving your creditworthiness. How? With liquid assets. These are assets you can easily convert into cash. For example, cash in the bank is the most liquid of liquid assets. Next best are cash equivalents, such as short-term government bonds, money market funds, and marketable securities, such as Treasury Bills and CDs.
What normally doesn’t count as a liquid asset? A few examples include real estate, cars, business equipment, art, jewelry, and collectibles. While these things may have tremendous value, they are not liquid. If the ability to convert an asset into cash isn’t quick and easy, it’s probably not a liquid asset.
Beyond liquid assets, mortgage professionals like to see a good credit score — 640 or higher is best. And a solid debt-to-income (DTI) ratio — a DTI of 43% or less is best.
Plus cash to put down. With a No Income Verification Loan, a mortgage professional will generally require a minimum cash down payment of 20% of the home’s purchase price. However, that percentage can, and often does, go higher.
Generally, a good credit score + 20% cash down + liquid assets = loan qualification.
Who should consider a No Income Verification Loan?
The self-employed. A No Income Verification Loan is a good option for the self-employed, especially those who have been their own boss for more than two years.
Non-traditional earners. Anyone with non-traditional income sources. Someone who can’t show standard income documentation for various reasons, such as being between jobs. A No Income Verification Loan is also a good option if you have a job with irregular cash payments.
Investors. With the ability to finance a range of properties, including one-unit to four-unit properties, No Income Verification Loans are often the go-to financing tool for real estate investors. This includes investors who are foreign nationals, those who aren’t citizens or permanent residents of the United States.
Anyone who could not qualify for a home loan because they can’t prove income should consider a No Income Verification Loan.
No, we’re not talking about subprime loans.
When many would-be borrowers hear of any home financing option that’s not a conventional mortgage, they automatically think of one word: subprime. And that scares them. And, yes, the thought of a subprime loan should get your inner alarm bell ringing.
Infamously a root cause of the 2008 Great Recession, subprime loans were given to millions of borrowers who stood a good chance of defaulting on their debt. Then, unscrupulous lenders would repackage these high-risk loans into pools and sell them in bulk to other lenders. Until the house of cards collapsed.
Things changed in the wake of that financial disaster, and today’s No Income Verification Loans look nothing like those dicey subprime loans of the past. Now, mortgage professionals must take great care to verify the borrower can afford the loan. Federal law requires it; legislation enacted after the 2008 crisis obliges mortgage professionals to ensure borrowers have the “ability-to-repay” (ATR) loans.
The Pros & Cons of No Income Verification Loans
The plus side of No Income Verification Loans includes:
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- Flexibility. A No Income Verification Loan comes with a choice of terms. A 5- or a 7-year adjustable-rate mortgage may give you the best initial interest rate. An interest-only loan is a favorite of investors. Or, you may choose the stability of a 30-year fixed-rate mortgage.
- Accessibility. From freelancers and small business owners to gig economy workers and others, people with non-traditional income streams can more easily get turned down for conventional mortgages. A No Income Verification Loan can offer a path to homeownership that might not otherwise exist. .
- Streamlined process. During an underwriting process, a mortgage professional usually needs to verify the borrower’s monthly income, employment history, proof of assets, and more. Not so with a No Income Verification Loan — fewer steps often means faster approval.
A few drawbacks of No Income Verification Loans can include:
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- Interest rates. It’s an inescapable fact of nearly all loans: higher risk = higher rate. While No Income Verification Loans aren’t the riskiest loans, they carry more risk for the mortgage professional than a conventional mortgage. Thus, a higher rate for the borrower.
- Down payment. While 20% is a suggestion for some mortgage loans, it’s a requirement for No Income Verification Loans. And more than 20% down is common, depending on the situation.