An alternative documentation loan is used to secure financing for the purchase of a property. Traditional mortgage loans require borrowers to submit a wide range of documents which could include tax returns, W-2’s, paystubs, retirement statements, and much more. Alternative documentation loans differ from conventional loans because the borrower is providing a specific type of document to obtain financing. Examples of alternative document loan programs include 12 months of personal or business bank statements, CPA-certified profit and loss documents, Verification of Employment only, asset depreciation, and/or lease income for investment properties.
Who Uses Alternative Documentation Loans?
Alternative documentation loans are often suitable for individuals who have unique asset or income situations. Self-employed individuals and freelancers can benefit from alternative documentation loans since they may file a more complex tax return. Because self-employed individuals often take advantage of tax deductions, the adjusted gross income reflected in their tax return appears low. This reported income would make self-employed persons unattractive in traditional mortgage loan scenarios. Individuals who earn a significant part of their income from tips could also benefit from an alternative documentation loan.
Why Use an Alternative Documentation Loan?
Being able to use alternative documentation will help establish the ability to pay instead of traditional income documentation. If you’re one of the previously stated individuals without a traditional tax return to verify steady income, these types of loans could help you secure financing for a home purchase. Additionally, those with special circumstances, such as being cashflow heavy business owners, can use alternative documentation loans.
What Alternative Documentation Loans Are Not
Alternative documentation loans are not the 2020 version of stated income/stated asset (SISA) loans, that were/are susceptible to exploitation. A primary cause of the 2008 financial crisis was unscrupulous borrowers and lenders using SISA loans to overspeculate and take advantage of high real estate valuations. The Dodd-Frank Wall Street Reform and Consumer Protection Act put more regulations in place around SISA loans to help prevent another financial crisis.
The government created SISA loans for individuals who earn income through non-traditional methods. It intended to grant easier access to financing a home purchase for these individuals. While the intentions behind the loan product were virtuous, because of their vulnerabilities, SISA loans are rare if even existent at all these days.
Post-Financial Crisis
Alternative documentation loans have gained in popularity since the 2008 financial crisis. This rise in popularity is due to the increased number of freelance workers in the U.S. Also, alternative documentation loans can close more quickly than their traditional counterparts. Underwriting these loans does not require as much time due to the reduction in documents needed to qualify for the loan. This quick process makes these loans a good option for those operating on a short timeline.
Alternative documentation loans exist to meet the lifestyles of people with special circumstances regarding income documentation. However, not all lenders will offer alternative documentation loans. Most big banks do not want to deal with the hassle or headache. Smaller lenders offer these loans as a way to better serve their customers. If you think an alternative documentation loan would be right for your situation, contact us at Park Place Finance to learn more and get started.