You may have heard of a no-doc loan, but you might not know what it means. No-doc stands for no documentation. It is a loan that does not require documentation to prove income or employment. However, this type of loan does not mean that no documents whatsoever have to be provided. There are some documents that have to be given to the lender in order to get the loan.
Most of the times the people who apply for no-doc loans actually qualify based on their credit scores. This is because they made an effort to pay all their debts and financial obligations on time. So, when they apply for a loan to buy a house, they qualify immediately. These people have to go through the usual appraisal and verification procedures in order to get the loan. So, while they will not have to give proof of the amount of income, they would still have to provide some proof that they have a job or business. So, no doc actually does not mean no documents. The name is a misnomer. The borrower has to provide limited documentation.
Usually when a person applies for this type of loan, he should be prepared to pay a higher rate of interest compared to traditional mortgage loan. The reason is that he will be perceived as a borrower who is at a higher risk of defaulting.
The reason people opt for this type of loan is because they have no choice. For instance, you were unemployed the previous year, but this year you have a good job to be able to think about buying a house. The only option for you would be this type of mortgage loan.
Once you have documented income, this type of loan can be refinance for a better and more competitive interest rate.
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