Are Low Doc Home Loans Right for You?

Low doc home loans offer a streamlined application process. The main goal is to expedite the mortgage process by requiring low or no documentation. This does not mean that you will not have to provide standard information such as your credit identification number or salary history. It does mean, however, that the lender may "take your word for it" without requiring verification of the facts you state. These low doc loans were popular in the years leading up to 2007, but they have gained a bad reputation since the credit crisis. 

Low Doc Loan Process

When you apply for a low documentation loan, you can expect a very short application process. Most lenders will make a decision within a few days or weeks on a low doc loan. First, you will need to submit an application with your relevant information. Next, the lender will enter the underwriting phase. With a standard loan, this phase would require verification of the documents you provided such as credit statements, income statements and applicable liens. With a no doc loan, none of these forms are required. Instead, the lender is going only by the information you supplied on your application.

Benefits of Low Doc Loans

The goal here is to keep the loan process short and simple. If you know you will qualify for a loan, a low doc loan is a great way to put an end to the hassle of a drawn-out application process. For a lender, this is an easy way to make fast decisions on borrowers to move very quickly to a "yes" or "no" answer.

Cons of Low Doc Loans

The problem here is obvious: without verification, an applicant can very easily mislead a lender. This opens the door to mortgage approvals for individuals who are lying about income or other debts. A lender may approve a loan that a borrower has absolutely no capability to repay. Beyond this obvious problem, there are other drawbacks to the low doc loan process. First, if you do have a good salary and credit score, you may benefit from applying for a standard loan. By verifying your positive information, a lender can present you with better options on your loan. If you do not have a good application and are fearful that you will be rejected, a low doc loan may not be the solution. A lender will take only a passing glance at your information, and a bad credit score can disqualify you immediately. Lying on your low doc loan application can also spell trouble. It may put you in a situation where the professionals who are supposed to advise you on what you can afford do not have the information to do their job properly.

Warning

In general, the cons of low doc loans outweigh the pros. Seek a low doc loan only if you have already paid off one mortgage or loan with a lender. In this case, the lender may already have your information on file. Otherwise, it is best to wait a few weeks to go through the loan application process correctly. If you are turned down, it may work out best for you in the long run. Taking a loan you cannot afford will not benefit you financially.

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