How no Doc Loans Work

Getting approval for a loan has become very difficult in the post financial crisis world as the amount of documentation needed to support loan applications have increased tremendously. One misstep in submitting the documents can literally mean having the application thrown out the window. Moreover, nowadays it takes months for the financial institution to properly go through all the documentation that are part of the application. Due to this fact, many customers cringed each time they have to go to a bank to get a loan.

Nowadays, thanks to financial innovation from some of the more enterprising banks, there is an alternative to the nightmare that is the traditional loan application. The alternative is in a form of loans called the no documentation loans or no doc loans. These loans offer potential applicants the ease of minimal paperwork, albeit at the cost of a slightly higher interest rate. The no doc loans came about because banks and financial institutions realized that certain groups of people have difficulties in proving all their income streams as there are many instances where the take home income is much higher than what is reported.

No doc loans were especially created primarily for those who are self-employed. One caveat to getting a no doc loan is that the applicant must have a good credit history. As a general rule of thumb, the applicant needs to have a credit rating of 650 or higher to be able to get a no doc loan approved. What is important here is the applicant’s credit history as no doc loan applications do not even ask for proof of income. All that the loan provider needs to know is that the applicant has the ability to repay the loan and it will be approved.

These loans are also very suitable for those who earn the majority of their income “off the books” for tips or cash. This is because most of the time, these people have difficulties in documenting their income streams which is needed for traditional loan applications. For example, someone who is waiting tables may only earn $1,000 on paper but has a take home income of $2,000 or more after tips. Getting a traditional loan approved may be difficult because of the low documented income so the other alternative would be to apply for no doc loans.

However, as convenient as applying for a no doc loan is, there is a downside to taking out this option. The drawback is in the higher interest rate charged for such loans. Of course, it is not a problem if the applicant can afford to pay the higher interest in return for getting the loan approved without the necessary documentation. That is why this type of loan is not for everybody, but only those whose circumstances leave them no other choice than to apply for no doc loans.