During the mid-2000s, mortgage lenders displayed an overzealous enthusiasm for granting mortgages just with a stated income declaration, and also no ratio loans (1) (2). The self-reported income information was not verified, so any exaggeration of income could result in an application being approved by banks and non-bank lenders (6). If borrowers desire to qualify, they must provide self-reported and unverified information, and this information may be exaggerated or incorrect (7). In the wake of such reckless lending behavior, many buyers have been saddled with large mortgages that they were unable to qualify for (8). Therefore, the risks associated with the housing market in 2008 arose (3), contributing to a variety of economic difficulties (5) that also impacted no ratio loans, in the form of high unemployment rates (9) and other outcomes (4). As a consequence, it was defined by the Consumer Financial Protection Bureau that loans should consider a debt-to-income ratio of the borrower of at least 43% (10).
A no ratio loan is a type of loan, utilized for mortgage loans, for which there is no consideration of the standard 43% debt-to-income ratio of the prospective borrower by the lender during the underwriting process thereof. No ratio loans hedge the additional risk of ignoring the debt-to-income ratio of the borrower with a downpayment of an average of 36% of the purchasing price of the home plus reserved funds to satisfy a year of mortgage payments.
Even though luxury home financing is not a conventional mortgage loan, it cannot be a no ratio loan. The reason is that there are consumer protections governing what the Consumer Financial Protection Bureau defines as a “qualified mortgage”: a loan system with different standards and regulations than conventional loans, such as the 43 percent debt-to-income ratio.
Generally, high credit score borrowers with an asset portfolio as well as outstanding credit scores are the only ones who will qualify for these types of loans.
The potential borrower may not be able to collect the necessary documents to be approved for a loan if he or she cannot gather the required documents to be selected for consideration.
Thus, in these cases, a no ratio loan could prove helpful.
Normally, a no ratio loan does not require borrowers to disclose his or her debt-to-income ratio to the lender – thus, the borrowers are able to obtain a loan without having to disclose anything, provided that other requirements are fulfilled accordingly.
The debt-to-income ratio of a person indicates the percentage of his or her earning that is set aside for debt repayment each month.
There are loans that are offered without income verification, so the lender does not have to take into account the debt-to-income ratio when they make the loan.
These types of loans are recommended for people who don’t want to reveal their income. With a No Ratio loan, a borrower’s credit score is excellent and they have a substantial amount of assets, which more than compensates the lender for the fact that the income information and the debt-to-income ratio were not taken into account.
The ratio of debt-to-income, which represents how much debt the borrower has relative to the amount of income the borrower makes, is often a major factor lenders consider when determining whether to grant financing for traditional mortgage applications.
It is possible for a loan application to be rejected if the debt-to-income ratio of the applicant exceeds the acceptable level. This is, however, not the case for the no ratio loans that we are discussing today.
Rather than that, the borrower should be able to demonstrate his or her ability to repay through a good credit rating and a low loan-to-value.
It is not necessary to provide a statement of income with these types of loans, although they tend to be requested. The debt-to-income ratio is not revealed.
For example, self-employed individuals or those operating on a commission basis often have difficulty proving their earnings, so these loans are ideal for them.
For example, mortgage lenders have strict requirements for mortgage applicants, where a debt-to-income ratio of 36% or less is generally required.
A no-ratio mortgage – a mortgage in which the lender disregards your debt-to-income ratio – is a product that is typically only available to individuals who are self-employed. The rationale is that providing conventional income and asset verification may be more challenging for self-employed people.
It is also important to consider that income from self-employment fluctuates. Moreover, income from such sources is not necessarily shown on a tax return.
There might be income that is not included in your tax return at all. Most entrepreneurs who own or run a business take many deductions out of their income, which results in a lower taxable income and a lower tax liability.
Lenders would not be able to determine from such information whether the self-employed person is truly earning a certain amount of money.
In short, a no ratio loan, as the name implies, does not consider debts to incomes ratios. It is true that there is full documentation and proof of income, but the borrower is not required to meet any qualifying ratios in order to qualify.
When it comes to securing mortgage funding, some people may find themselves facing difficulties due to their debt-to-income ratios, or the amount of debt a person owes in relation to their income.
There are no-ratio mortgages, which are mortgages where potential borrowers do not have to provide income verification. These types of mortgages are traded at a slightly higher interest rate to compensate the lender for the extra risk it is taking on by not verifying the income of the prospective borrower.
It may be appropriate to use a no-ratio credit line for self-employed borrowers that have substantial tax deductions, borrowers that have substantial savings, or borrowers that can only prove a portion of their income.
When a lender deems you eligible for a no-ratio loan, ensure that the installments you will have to pay for the loan are reasonable. It is true that ratio loans can and do have their place and purpose, however, they should never be used as a method of extending a potential borrower’s eligibility.
Loan Requirements For No Ratio Mortgages
To qualify for a no-ratio loan, normally a no ratio mortgage loan, the prospective borrower is required to perform a down payment of a modal average of 37 percent of the purchasing price of the real estate object plus the disponibility of reserve funds to cover a year of the mortgage installments.
During the credit check process for the lender, your source of income will be validated as well as your self-employment status for the past two years. It means that you are going to have to prove that you are operating a legitimate business.
Moreover, you will have to possess a good credit score as well.
Contrary to traditional underwriting criteria that require borrowers to submit tax returns, paystubs, and W-2’s, lenders of no ratio loans offer their products on the basis of credit scores and their overall financial profile.
In addition to the reduced documentation requirements of a no-ratio mortgage, self-employed borrowers may also benefit from the reduced requirements of such a mortgage if they have undocumented additional income.
Your credit history will determine whether or not you will be approved for a no ratio loan since it is the most crucial KPI (Key Performance Indicator) that must be considered during the underwriting process.
A financial institution views no ratio loans as a riskier proposition, which means you will pay a higher interest rate if you opt for a no ratio loan as a borrower.
Features Of No Ratio Loans
- No Debt-To-Income ratio calculated.
- Houses, condos, and Planned Unit Developments (with approved zoning) included
- Loan-to-value ratio as high as 75% and if it is a first-time homebuyer, the maximum will be a 70% LTV.
- Second homes eligible.
- Normally “owner-occupied”. Corporations’ and LLCs’ eligibility should be discussed case by case.
- Loan approvals available without asset seasoning
- Minimum 680 to 700 FICO
- No tax returns, no W2s, and no income verification
- Loans up to $2,500,000 or higher in some cases
- Loans available in all 50 states, but not all financial institutions offer them.
- No restrictions on cash-out financing
- Simplified asset verification with only the earnest-money deposit check and one-month bank statement covering at least thirty days.
- Not a bank statement loan, but requires 5/6, 7/6 ARM (adjustable-rate mortgage), 15 or 30 years fixed.
- The rate of interest you will be charged on a no ratio loan that is assumably the rate on a typical mortgage will be approximately half a point higher, but depending on the loan-to-value ratio on the property, the lender may increase the rate.
- Additionally, most lenders require that you work at the same position for a minimum of twenty-four months, otherwise, they will raise the interest rate on your loan.
- Up to 100% of borrower funds may come from gifts. Gifts allowed for a down payment, closing costs, and reserves.
Benefits Of A No Ratio Mortgage
No-ratio mortgages are a type of no ratio loans and are perfect for borrowers with good credit histories who lack the income documentation required under the underwriting guidelines for a conventional mortgage. Less documentation could mean less processing time for the mortgage and a quicker closing for borrowers in a rush to complete a transaction.
Another way that you can be approved for a no ratio loan is if you are not financing your entire home. If you are borrowing less than the value of your home you will most likely be approved. This type of loan is used to finance smaller projects, not to purchase big ticket items.
Finding No Ratio Loans With Mortgage Brokers
You may need to consult a mortgage broker to find a no-ratio mortgage since larger banks and other conventional lenders no longer offer them, and you probably will not be able to get a fixed 30- or 15-year loan.
Typically, these loans come with an adjustable interest rate, and they may be slightly higher than the rate for a conventional loan.
That is because you, as the prospective borrower, have to compensate the lender for the extra risk it assumes by giving you a mortgage without being able to verify your debt-to-income ratio.
Although strict no-documentation loans are rare, no-ratio mortgages, a modified version of the no-doc, and stated income loans are still available on a limited basis for people who meet certain requirements.
With these no ratio loans, you do not need to verify your income for the lender, but they are not easy to find. Mainstream banks steer clear of them, and they are typically available only to self-employed borrowers.
This loan can be a quick and easy process for borrowers that would have difficulty gathering documentation. Keep in mind that very few lenders offer this type of loan at the moment, but those who do would be happy to find a prospective customer like you.
We have interesting articles about non-conventional mortgage loans. The basic ones we will recommend to you are stated income loans, where we discuss if they are currently legal or not, how can you obtain one, and the situation of these loans in California. We are also covering other non-conventional mortgages, such as the ITIN mortgages, luxury home financing that is a figure similar to the jumbo loans, the no ratio loans that do not consider the debt-to-income ratio during the underwriting process, and those loans offered by Funding For Flipping.
If you are into more conventional mortgages such as FHA mortgages, I suggest you read the following related articles described below.
We explain the FHA loan requirements completely, with the current limits for this year. We also go through the appraisal guidelines, and moreover, we are worried about the peeling paint and why it can be an issue.
Completing forms is necessary, so we also study the number format of an FHA case and how to submit an FHA file, how to complete the form HUD 92900, the form for the FHA notice to the homeowner, and the FHA Financing Addendum.
Regarding special housing programs, I would like to include the FHA Back To Work Program.
I am David, economist, originally from Britain, and studied in Germany and Canada. I am now living in the United States. I have a house in Ontario, but I actually never go. I wrote some books about sovereign debt, and mortgage loans. I am currently retired and dedicate most of my time to fishing. There were many topics in personal finances that have currently changed and other that I have never published before. So now in Business Finance, I found the opportunity to do so. Please let me know in the comments section which are your thoughts. Thank you and have a happy reading.