No-Ratio Mortgage Loans
What You Need To Know
When applying for a mortgage, the lender usually requires the borrower to meet certain criteria to qualify for the loan. One requirement is the debt-to-income (DTI) ratio – the amount of debt you owe concerning your income – which should be no more than 43 percent for most lenders.
This requirement makes it difficult for borrowers with a lot of debt and unstable income to qualify for the mortgage due to their high DTI. What if we told you there’s a solution with no-ratio mortgages?
That’s right! No-ratio mortgage loans don’t have stringent requirements like traditional mortgages.
What Is a No-Ratio Mortgage?
A no-ratio mortgage is a type of home loan product in which the debt-to-income ratio isn’t a limiting factor. That is, the lender doesn’t require the borrower to disclose their debts or income. The lender doesn’t rely on this information to approve a loan.
Instead, they focus on your overall credit history, assets, and down payment size. Therefore, no debt-to-income ratios are calculated in this type of loan.
Such loans are perfect for people who do not want to disclose their debts or income, or those who have significant debts.
Benefits of a No-Ratio Mortgage
The no-ratio mortgage can be beneficial to most people at various stages of real estate investment:
- Typically, the larger your investment portfolio, the harder it becomes to get a loan. This is because, on paper, you’ll have a higher debt-to-income ratio. As such, in the eyes of the lenders, where the prerequisite is low DTI, you don’t qualify for an additional loan. The no-ratio mortgage offers investors a legitimate bypass to securing a loan.
- With the no-ratio mortgage, no tax returns are required. The lender will just need to verify your employment, not your actual income. This makes it ideal for people who do not receive regular paychecks but have assets and plenty of money, like an entrepreneur who runs a successful startup and has huge equity in the company.
- With income documentation out of the way, the process becomes less time-consuming, giving the borrower access to loans faster than conventional mortgages. If you’re a salaried borrower with additional income that can’t be readily documented, a no-ratio mortgage is more streamlined. If you’re self-employed, you don’t need to provide штсщьу documentation or submit business tax returns.
That said, expect to pay higher interest rates for no-ratio mortgages. Since you’ll be providing limited information about your income, the loan carries a higher risk of default.
How to qualify for a No-Ratio Loan?
So, how can I qualify for a no-ratio mortgage?
For the most part, the process of applying for a no-ratio loan is similar to that of other mortgages, although the process will vary from one lender to another. But here’s the basic guideline that you’ll most likely go through:
Checking your credit score
The first step to applying for a loan is to check if your credit score meets the threshold. Again, this will vary from one lender to another. You may need a minimum credit score of around 620 FICO.
Remember, a no-ratio mortgage requires limited information about your income or employment status. To create a buffer around that, lenders will require you to have a decent credit score. The credit score determines how much down payment you’ll make for the property you want to buy.
For example, a credit score of 720 can qualify for a 10 percent down payment on no-ratio mortgages.
Gather all necessary documents
Now, once you’ve established your creditworthiness and know that you qualify for the loan, you’ll need to prepare all the necessary papers. This may include proof of income and employment, proof of assets, and details of the property you want to buy.
In addition, the lender may request additional documents. For example, if you’re self-employed, you may need a CPA letter of verification, confirming that an accountant or accounting firm has independently verified your tax returns and can attest that your income comes from self-employment.
Finding the right lender
There are hundreds of mortgage lenders in the market, all with unique products and loan requirements. Therefore, shop around to find the lender who offers the most favorable terms and meets your specific needs.
More importantly, shop for the best interest rates that you can afford.
Submit your mortgage loan application
Once you identify the lender that’s right for you and have prepared your credit report and all the required documents, it’s time to submit your loan application. The lender then reviews your loan application and approves or denies it.
Waiting for the mortgage loan approval
If the lender finds you eligible for the loan, they will approve it and provide the loan estimate as well as the terms of the loan, such as interest rates, processing fees, and closing costs.
The final step of the loan approval process is to forward the mortgage loan approval. The lender then coordinates the closing with the title company, where concerned parties will sign the mortgage documents. The funds will then be wired, and when the seller receives the funds, the title will change hands.
Once the entire process has been finalized, the seller will hand the keys to the real estate property to the new owner.
No-Ratio Mortgages Requirements
To qualify for a no-ratio mortgage, the lender will require you to provide the following:
- Proof of income.
- An excellent credit score. No-ratio mortgages require a higher credit score than traditional mortgages with income documents. You may need to have a credit score above 700.
- The ability to afford the down payment. This will vary, but be prepared to pay up to 30 percent or more as a down payment.
- Proof of assets, such as your investment accounts or bank statements.
There could be other requirements based on the lender, your location, and the type of real estate investment you’re interested in.
No-Ratio Mortgage Vs. Traditional Mortgage
No-ratio mortgages might make more sense to certain people than traditional mortgages. For example, if you’ve recently had large business expense write-offs, like commercial property purchases, your statements may show low net income. A traditional mortgage considers a borrower with a low DTI as eligible, and you might not get approved for that reason.
Likewise, if for one reason or another, your income declined recently, it might appear as a red flag for traditional lenders like banks, especially for the self-employed. A no-ratio loan allows you to apply for a mortgage without tax returns that reflect declining income.
In addition, if you don’t have a regular income, for example, as a freelance worker, you may have a hard time documenting your income and tax returns. The no-ratio mortgage doesn’t require any documentation, unlike the conventional mortgage, making it the go-to option.
Traditional mortgage loans have stringent requirements that are often limiting to people who have a high net worth but no job. Lenders will consider various factors, such as your ability to repay if you have a stable job, your credit score, and documents to support your income and employment status.
The main advantage of a No-Ratio Mortgage
One of the most important things for a lender is the debt-to-income ratio. The higher this parameter, the higher the likelihood you may be denied a loan by the lender’s underwriting rules.
Therefore, No-Ratio Mortgage is a good option for borrowers with good credit history but no income documents. With this option, you will also provide less documentation and close the deal faster.
Is a No-Ratio Mortgage a Good Option?
Any kind of real estate loan comes with a level of risk if you default. Usually, lenders will need to verify you can repay the loan with proof of assets or cash flow. Before applying for a no-ratio mortgage, consult with an experienced mortgage broker.
With years of experience in the mortgage industry, our team is well-equipped to guide you through the loan process and help you make an informed decision!
Contact us today to learn more about No-Ratio mortgage options.