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 down payment of 35 to 40 percent of the purchase price of the home plus reserve funds to cover 12 months of mortgage payments.
Despite the fact that luxury home financing is not a conforming mortgage loan, it must still comply with consumer protection provisions for what the CFPB finds to be a “qualified mortgage”: a lending system with standards and rules unlike traditional-home loans like a 43% debt-to-income ratio.
Normally these loans can only be obtained by borrowers that have excellent credit ratings, in addition to a strong portfolio of assets. There is a chance that no ratio loans will be of assistance to borrowers who are not currently able to gather documentation for the purpose of getting a loan.
A no ratio loan is a type of loan that does not require a borrower to present his or her debt-to-income ratio to a lender.
A debt to income ratio shows the percentage of a person’s income that goes towards paying debts, monthly.
No Ratio mortgage loans are for borrowers who do not wish to disclose their income; therefore there is no debt-to-income ratio for the lender to consider. The No Ratio loan borrower has good credit and an abundance of assets that make up for the lender not considering the borrower’s income information.
Generally, lenders consider the debt-to-income ratio of a borrower as a primary factor in deciding whether to provide financing for a conventional mortgage application. It is possible for a loan application to be denied if an applicant’s debt-to-income ratio exceeds the accepted limit. However, this is not the case in these no ratio loans we are studying here.
The borrower instead, should demonstrate an ability to repay through good credit history and a lower LTV ratio. Statement of income is not required, but normally it is known in these loans. What is not disclosed is the debt-to-income ratio.
These loans are perfect for people with incomes that are hard to document, such as those that are self-employed or work on a commission.
Mortgage lenders have stringent standards for borrowers, including a debt-to-income ratio no higher than about 36 percent. To get a no-ratio mortgage — one where the lender doesn’t take your debt-to-income ratio into account — you usually must be self-employed. The reasoning is that it may be more difficult for self-employed individuals to provide traditional income and asset documentation.
For one thing, self-employed income fluctuates. And such income does not necessarily show up on a tax return. Business owners typically take a lot of deductions, which reduces their taxable income and the amount of tax they owe. This does not give a lender an accurate picture of a self-employed person’s actual earning power.
A no ratio loan does not look at a debt to income ratio, we can conclude. The income is fully documented, but there are no qualifying ratios that the borrower needs to meet.
A borrower’s debt-to-income ratio, the amount of debt a person has in relation to income, could pose a challenge for someone in need of mortgage financing.
With this loan, the borrower could document the income but the debt-to-income ratios were not considered during the loan approval process. These mortgages, issued as no ratio loans, come with a slightly higher interest rate in order to compensate the lender for the extra risk of issuing the loan without verification of the income of the prospective borrower.
Some examples of why a no ratio loan would be used are for self-employed borrowers who have significant deductions on tax returns, borrowers who may have a significant amount of savings or borrowers who can only document part of their income.
If a lender is qualifying you on a no ratio loan, just make certain that you are comfortable with the payments. No ratio loans have a place and purpose, but they should not be used to stretch how much a borrower can qualify for.
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 35 to 40 percent of the purchase price of the home plus reserve funds to cover 12 months of mortgage payments.
The lender will verify the source of your income and that you have been self-employed for at least two years. In other words, you have to show that you have a real business.
You’ll also need to have an excellent credit score.
Unlike underwriting requirements for conventional loans that rely upon the information contained in tax returns, paystubs and W-2 forms, lenders offering no-ratio mortgages rely upon a borrower’s credit and overall financial profile.
Self-employed borrowers find the relaxed documentation requirements of a no-ratio mortgage beneficial, but it could also prove to be convenient for a salaried borrower with additional income that cannot be readily documented.
Whether or not you are approved for a no ratio loan depends on your credit history, as this is one of the most important KPIs (key performance indicators) that the underwriting process considers.
You will pay a higher interest rate on a no ratio loan because this type of loan poses a higher risk to insurance companies. The less information that the company has, the more likely they are to suffer from you defaulting.
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 interest rate will usually be about a half-point higher than the rate for a conventional mortgage, however, the lender may raise the rate depending on your credit score and the loan-to-value ratio on the property. Most lenders also require you to have been employed for a minimum of two years at the same job, or they may also increase your rate.
- 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.