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1. Full Documentation: Borrowers provide pay stubs, W-2s or federal tax returns for self-employed. Generally lenders require a two-year history to substantiate
borrower's income.
2. Easy Doc/Simple Doc: Borrowers provide bank statements to substantiate monthly income.
3. No Income: Lenders use stated income from loan application and borrowers do not have to provide any documentation to substantiate income. This type of loan is known as "No Income Qualifier".
Lenders will assess a lower grade on loans when little or no documentation is provided to substantiate borrower's income.
Loan-to-Value. Non-traditional lenders adjust loan-to-value ratio as a method to reduce risk of financial loss if a borrower defaults and there is a loan foreclosure. Most lenders believe borrowers with a low loan-to-value ratio have a lower probability of a foreclosure than a borrower with a high loan-to-value ratio. In cases where a borrower has a low credit grade and/or little income documentation, lenders may reduce loan amount.
Loan Programs. There is little difference in loan programs provided by traditional and non-traditional lenders. There are 30 and 15 year fixed mortgages, balloon mortgages, and Adjustable Rate Mortgages (ARM's). Non-traditional lenders assess higher rates and fees when there is a lower credit grade, a lack of income documentation or a high loan-to-value ratio.
Some industry experts believe one out of eight loans are non-traditional. As this market expands, competition in non-traditional mortgage market will produce better rates, loan programs and terms.
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