Real estate investing is both exciting and monotonous; lucrative and costly; challenging and conquerable. Whether investors choose wholesaling, land-lording or real estate investment trusts — or a combination of the three — few do it simply for the fun of it. Most often, they seek a profitable living from this activity. Yet the nature of this work means the income from it flows from multiple sources at an intermittent tempo. Borrowing money for projects gets hairy since regular pay stubs and simple 1040s are not available or do not reflect the investor’s capability to pay the extended credit back promptly.
No Doc Loans when Revenue Ebbs and Flows
Due to the fluctuating nature of investors’ incoming receipts, obtaining a mortgage for a property presents more obstacles than for a salaried employee, say. In recognition of this challenge, some banks and finance businesses established the no doc loan. Having come under fire for the credit crisis in the 21st century’s first decade, this loan product was pulled by many institutions. Still, as the critical mass from that event fades into history, the no doc loan is enjoying a huge comeback.
No doc is really shorthand for no income documentation necessary. This means that a loan applicant’s declared income is accepted by the underwriters with no authenticating records to prove it. Doing so adds risk for the lender so mortgage loans of this sort generally come with a higher price tag in the form of interest rate, settlement fees and, sometimes, a larger down payment. At the same time, investors are relieved the enormous burden of proving cash streams that ebb as often as they flow. Why would a bank trust the word of an investor? They rely on other sources to validate an applicant’s trustworthiness: credit report, evidence of business longevity, bank statements and other asset demonstrations. Plus, the value of the subject property — vital if foreclosure is ever warranted — is also a significant offsetting factor.
How No Doc Mortgages Help Investors
Real estate investing is a highly competitive enterprise where time is as valuable as money. Streamlining the loan approval process only helps investors who need to make deals before someone gets the jump on them. Since wholesalers do not hold onto property for too long — hopefully — the lack of prepayment penalties on no doc mortgages is to their great benefit. With decent cash reserves and good credit, real estate investors can qualify, close and move on to the next project. Since remedial measures are now codified into law, the old scenario when owner-occupants were getting no doc credit is forbidden, leaving the field wide open for entrepreneurs.
The prospect of higher rates, more fees and a larger amount of upfront money may daunt an inexperienced investor. After all, higher rates increase the debt service — thereby diminishing cash flow — while a bigger deposit shrinks the cash-on-cash return. More seasoned real estate professionals recognize the pros of a no doc loan while mitigating the cons by negotiating a lower purchase price or raising rents, for example.
When in Doubt, Get More Info
Whether a veteran investor or a newbie, a house buyer can enjoy expedited and less complicated approval proceedings by opting for the no doc mortgage. Yet the numbers should crunch so that the property turns out to be a worthwhile asset. Loan officers well-versed in no doc products — and worthwhile alternatives — are the best resources to employ in order to discover how a no doc loan can help or harm the bottom line of any buyer.
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.