Self-employed and commissioned borrowers face a unique situation when trying to obtain a mortgage. Because their cash flow might not be as consistent as someone with a standard salary, it can be hard to document their income for qualification purposes. These borrowers are often left without a mortgage because of the difficulty with their income despite the fact that they can probably afford the mortgage. As the industry makes a comeback, however, smaller lenders are willing to take a chance on borrowers such as these, allowing them to use alternate or no documentation to get the mortgage they need. The big question is, however, are interest rates much higher?
Interest Rates on Low Doc Loans
The interest rate on any loan is tied into the risk level you provide the lender. There is no certain interest rate that every borrower will be charged. Instead, it is based off of your exact risk level. Among the things the lender looks at to determine your interest rate includes:
- Credit score
- Amount of down payment
- Debt ratio (if you are verifying your income)
How the products vary depend on what you need. For example, a commissioned borrower that makes a meager salary, yet makes great commissions at certain times throughout the year would not be able to get approved for a full doc loan. He would, however, be a great candidate for a low doc loan where he could use his bank statements in the place of the income documents. His bank statements would show the cash coming in and out of his bank account, which gives the lender an idea of how much money he does make. Typically, the lender will use the last 24 months of bank statements to determine the cash flow and average it out over that time period. Another example would be a self-employed borrower that does not have the best credit because of the amount of outstanding debts he has to get his business started, but who has a thriving business. His tax returns might not show adequate income because he takes every possible write-off to decrease his tax liability, but his bank statements show the cash coming in, accounting for his income.
Each of the above borrowers poses a different risk level for the bank. If the commissioned borrower has a credit score of 720, puts down 30 percent on the home, and has a debt ratio of 28/33, based on his income in his bank statements, he will have a pretty competitive rate. It will not be as low as someone with a conventional loan because the lender has to add a little bit to the rate to make up for the lack of documentation, but there should not be too many other add-ons for this borrower. The self-employed borrower might be slightly riskier simply because he owns his own business rather than is employed by someone. If his credit score is also lower because of the amount of outstanding credit he has, that will add to his interest rate because of the higher level of risk. If he puts a large down payment (at least 30 percent) down, though, he can minimize his risk and keep the interest rate at a manageable level.
As you can see, the interest rates for low doc or no doc loans can vary just as much as any other loan type. What your individual factors are is what drives the interest rate. The best way to ensure a low rate for this type of loan is to make sure your credit score is as high as possible before applying and also to get all of your ducks in a row in terms of your income, whether you are stating it or verifying it with your bank statements. The more you can verify and the more “skin in the game” you have with a higher down payment, the lower your interest rate will be.
As with any loan, however, every lender is different. If you do not like the rate given to you by one lender, shop around with others. More and more lenders are offering these loans to the commissioned and self-employed borrowers that make up our economy today!