When applying for a mortgage, you can choose to declare your income using a full income verification loan, or opt for a loan in which the lender doesn't verify how much you earn. Do you know what the differences are?

It isn't a question of Southern hospitality when your lender asks you whether you want to disclose your income on a mortgage application. The income declaration decision is an important one that will affect other aspects of your loan.

A conventional mortgage requires you to submit one or two years of paystubs or W-2s to document your salary. But not everyone earns W-2 income, which is why mortgage lenders have alternate solutions. These are: the no income verification mortgage, the no ratio loan, and the no doc mortgage. Each of these has a slightly different level of verification and, therefore, different pricing. Generally speaking, the more verification that you provide, the lower your interest rate will be. Choose the most conservative loan type for which you can qualify.

No income verification

When you apply for a no income verification mortgage, you'll list your assets, employment history, and your income on the application. The lender will confirm the assets and your status as an employee, but you won't have to provide documentation of your income. This doesn't mean that you can exaggerate the money you make, however. If the income you state seems unrealistic relative to the job that you do, your lender will ask questions.

No ratio mortgage

If you're willing to state assets and employment-but not your income-on your application, a no ratio mortgage is an option. Like the no income verification loan, assets and employment will be verified. But unlike the no income verification mortgage, you don't have to state your income. This program is called the no ratio mortgage because the lender can't calculate debt service ratios without an income figure.

No doc mortgage

A no doc mortgage is the most expensive of the three options. You don't need to state your employment information, your assets, or your income on the loan application. The loan is approved entirely on the strength of your credit history and the value of the property that you're attempting to buy. Generally, this type of loan will require a larger down payment than the others.

Regarding the subprime meltdown

If you're self-employed, or otherwise unable to document a regular income, the current lending environment may present some challenges. Lenders still offer alternative income documentation programs, but they're likely to require higher credit scores and bigger down payments to make up for what they perceive as additional risk. Plus, the difference in pricing between a conventional mortgage and a stated income mortgage might be larger than you expect. Over time, the mortgage industry will recover, and these differences should become less extreme. That's when you can expect to see some real hospitality from your mortgage lender.

Published on May 19, 2008