What Is a No Documentation Construction Loan?

If you are building a custom home from the ground up or remodeling your existing home, a home construction loan can help you make your vision a reality. The variety of loans available for construction, home improvement or renovation is amazing, which is good for you because you can get the best loan for your project.

Standard home construction loans require detailed verification of income and employment information as part of the application process. What if you are self-employed? You might find it difficult to verify your income. A no documentation construction loan could be the answer for you. A no documentation loan (also known as the no doc loan) is a type of home construction loan that does not require verification of your income, employment or assets.

No documentation loans come in three varieties, which are distinguished by the amount of documentation and verification they require.

A pure no documentation loan requires no income, employment information, or assets to be stated on your loan application. This means that only your credit profile and the value of the property will be verified as part of the application process. Pure no documentation loans tend to charge higher interest rates than loans that require more extensive documentation.

No ratio loans, for example, require you to verify your employment and assets, but you do not have to state your income. As a result, no ratio loans charge lower interest rates than the pure no documentation loan.

A stated income loan also requires you to verify employment and assets, but you will also need to state your income. This statement is not subject to official verification. Stated income loans tend to charge the lowest interest rates of all no documentation loans.

Another thing to consider when deciding which type of construction loan is right for you is the loan to value (LTV). This is the ratio of the loan amount compared to potential value of the new or renovated home. The LTV percentage tends to increase as the required level of income, employment information, or asset verification increases. So in addition to being more expensive, the no documentation loan will allow you borrow less money than a standard loan. You will need to carefully consider the costs and benefits of each type of loan to see what will make you and your pocketbook happy.