No-Ratio/No Doc Loans

No-Ratio/No Doc Loans

This is a term which is used to denote a specific type of mortgage, one which does not use the standard qualification in determining the individual’s eligibility. In particular, the borrower’s income is not used in determining whether or not one qualifies for the mortgage. The loan will be based on the down payment, assets and the credit score of the borrower. Those who may not want to disclose their income or have highly variable incomes would prefer this type of financing due to its flexibility. Given that this type of mortgage has an element of extra risk which the lender incurs; it is offset by charging a higher interest than one would be charged in a home loan where income is verified.

No ratio is when you have an investment property that either doesn't have a positive cash-flow or has no cash-flow at all. These are usually properties that are to be used as a rental but don't have a current lease agreement. This type of loan is also used for Air BnB properties as the monthly income fluctuates greatly. While it is a more expensive type of loan, it is a great option for people with short-term rentals or those who have just bought a property and haven't received a lease agreement yet. 

Advantages of no ratio/no doc loans:

• They do not require income documentation. This makes it easy for those who are self-employed or those whose income vary periodically to get home finance.
• The requirements are not as stringent as other traditional financing. 

Disadvantages of no ratio/no doc loans

• They are more expensive given their risky nature.
• Not many lenders are willing to advance these kinds of loans.