As with the NIV loan, the No Doc program is more risky for the lender than standard "Full Documentation" loans, because the income calculation provides the lender with a statistical analysis of the borrower's ability to repay the loan.
Moreover, undocumented assets could come from borrowed funds—so the borrower's actual debt load is even higher.
Without the income qualification of standard loans, lenders are assuming a higher level of risk. To offset these risks, No Documentation loans charge higher prices and require larger down payments than comparable full documentation programs.
Most No Doc programs charge interest rates that are 1.50 to 4.00 percentage points higher than comparable full documentation loans. For example, if a conforming ARM loan was currently at 6.00%, an A-credit No Doc ARM loan would probably be around 7.50%-10.00%.
The most serious cost of the No Doc program, however, is the down payment requirement. Most No Doc programs require at least 20%-25% down payment for A-credit borrowers; C-credit and D-credit borrowers should expect to make at least 30%-40% down payments.
As you can see, there is no such thing as a free lunch. However, for many investors, the No Doc program is an intelligent option. They often find that the loan payments—though at relatively higher rates—are still affordable, and the down payment is merely an investment that they can always recoup with a second mortgage or a sale.
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