No-Doc lending is a unique niche that is very different than other sub-prime products. No-Doc loans are one type of private loan. Typically sub-prime lenders underwrite primarily on credit, income, or cash flow of the property. The no-doc lender solely underwrites on the property and not the borrower. For example, if a borrower has a 430 credit score, most sub-prime lenders would be unable to accommodate this borrower solely based on his or her credit. A no-doc lender would focus on the property. As long as the property has enough equity in it, the no-doc lender will make the loan.
There are many advantages of no-doc loans for clients. First no-doc lenders require very little documentation from the borrower/broker. The key pieces of data will revolve around the valuation of the property (rent rolls, pictures of the property). Second, no-doc lenders are able to respond very quickly. Many are privately funded so there are no loan committees to wait on. Finally, rates, terms, prepays are flexible with most no-doc lenders. Since they are privately funded, they can be flexible on how they structure the loan to best fit the deal.
Who are the typical clients for a no-doc program? Typical clients fall into five primary categories:
- Time impaired borrowers: These are borrowers that have to close quickly due to contract expiration on a purchase or because they need cash now for other purposes. These customers fall out of traditional sub-prime programs due to their time requirements (two weeks or less)
- Credit impaired borrowers: These borrowers have somehow significantly hurt their credit (bankruptcy, foreclosure, etc…) and need cash to clean up credit issues or buy himself or herself out of a foreclosure or bankruptcy.
- Require a non-recourse loan: Many borrowers are unable/unwilling to personally guarantee a loan and need to close solely in the name of an entity. Traditional banks are typically unwilling to write a non-recourse loan, most of their products are heavily credit score driven.
- Borrowers that are unable/unwilling to disclose information: In many situations the borrower is unable or unwilling to disclose all of the necessary information for a more conforming product (tax returns, operating statements, etc…).
- Borrowers that have properties that are not currently cash flow producing: A borrower might have a property that is not fully occupied or totally vacant. For example, a client might own a building that is in a great location, but they have only occupied twenty percent of the building. This building still could be very valuable as collateral due to its location and property type. Most conforming lenders require at least a minimum debt service coverage ratio (DSCR) and would not lend on a property that falls substantially below their DSCR.
A no-doc lender can help clients in all of these five categories since they are underwriting solely on the asset and not the borrowers credit, income, or payment ability. A true no-doc lender is also able to understand the true value of the property even if it is not currently cash flow producing.