Self-Employed or Working on Commission? You Can Still Get Obtain a Mortgage...For a Price.

When applying for a mortgage, most homebuyers can document their incomes by providing evidence of a steady paycheck, tax returns, W-2’s, and bank statements, but many home buyers don’t draw a steady paycheck from a full-time employer. Some own businesses, some make infrequent commissions, others live off investments or even obtain their income from criminal pursuits. There are others, like movie stars or high-profile individuals, who don’t want to provide tax or other income documentation at the risk that the information may end up on the front page of The Enquirer. For individuals like these, limited-documentation mortgages remain a viable option, despite the tightening credit market.

Low documentation mortgages are called "low-doc" and "no-doc" due to the amount of documentation loan originators require to obtain an underwriting decision. At a minimum, obtaining such a loan will require an excellent credit score, an appraisal, and a significant downpayment. More often than not, you will need to provide paperwork such as tax returns and/or profit-and-loss statements.

There are three main types of low-doc/no-doc mortgages. These types of mortgages usually carry higher (sometimes significantly higher) interest rates than conventional mortgages, often as many as two points, which is essentially a premium that you pay for the ability to purchase without standard documentation and privacy.

Stated-income mortgages. These are for people such as self-employed individuals or those who work on commissions (like real estate agents and loan officers), who work but don't earn a regular salary. These individuals usually make significant incomes but it does not necessarily show up on their bottom line, largely due to the number of tax write-offs they can claim.

These applicants must disclose annual earnings, usually for the last two years and sometimes more. (If the income from various years varies significantly, they are usually averaged.)  The buyer will probably have to provide, tax returns, bank statements, and profit-and-loss statements (for businesses) as well. They must also list assets and debts.  Lenders look at two ratios: the percentage of income that goes toward the mortgage payment, and the percentage that goes for all debt, including mortgage, credit cards, auto loans and other loans.

The interest rates will vary depending on the amount of down payment, credit scores, and other factors, but they generally run as much as a point above conventional rates.

No Ratio Loans. These loans are usually obtained by wealthy people and retirees who live off investments. The buyer doesn't declare income. No pay stubs, no W2s, no tax returns. No nothing. Because this documentation isn’t provided, the lender can’t compute a debt-to-income ratio.  The borrower does, however, provide a list of assets -- money in the bank, stocks and bonds, real estate, business ownership.

The interest rate for a no-ratio mortgage could go as much as 3 points higher than a conventional mortgage, depending on credit score, size of down payment, and the property appraisal.

No-doc or NINA (no income/no asset verification). These mortgages require the least documentation and are for creditworthy people who want maximum privacy and can afford to pay up to a 3 point premium to receive get it. They are for people who can afford to pay people to take care of their finances. The buyer might provide their name, Social Security number, the amount of the down payment, and property address--and that’s pretty much it. (Oh, to have that life!) The lender will only pull their most excellent credit report and order a property appraisal.

Programs vary from lender-to-lender, so please contact your mortgage professional for more information.