By David Pilley on July 7, 2011
.jpg.aspx?width=75&height=75) Having a good credit score can mean a multitude of loans are available to you. Of course, having a source of income is also important once you decide to take out a loan. Lenders usually have a lot of questions to ask about what you have and the verification of your assets. Sometimes they don’t, and you need to be careful in situations where a lender does not ask you about what you have. Last year, I wrote about the NINJA loan, the so-called “no income-no job-no assets” loan that was widely popular in the early 2000s but ultimately contributed to the housing crisis because of its subprime nature. There is a type of loan you can take against your equity called a no income verification loan that, while not necessarily subprime, could cause some headaches if you are not careful.
Not all incomes are easily documented. If you are self-employed or the majority of your income is from alimony or child support, you might have a lot of tax write-offs, but you will also have a difficult time procuring documents, such as canceled checks, that show what you make. In this case, a no income verification home equity loan would be the optimal way to get a loan. This type of loan is also called a “stated income loan” because, while it doesn’t ask for verification, you might need proof of a certain dollar value of assets you have.
You need to be careful in a situation where this type of loan is offered. You might think it’s a positive to not require verification of your income, but you always need to be aware of scams. The only people who should really consider this type of loan are self-employed people who naturally don’t have readily-available documentation of their income, and even those people should be wary of taking out a loan against their home’s equity. Because there is less documentation necessary, a no income verification loan might have more fees than a typical loan.
Think about it further. This is a loan against equity. Equity is the difference between your home’s value and the amount you’ve paid on your mortgage. Since most property values are not increasing right now, the only sure way you can gain equity is by paying off your mortgage. If you default on a loan against your equity, you might end up with an upside-down mortgage. In this situation, you could have a foreclosure and still be in debt afterwards. If you don’t lose your house to foreclosure, you might need to extend the length of time of the original mortgage now that your equity has been lost.
With a no income verification home equity loan, it would be best if the lender actually does a credit check on you. If he/she is checking your credit, he/she is making sure you’re not at risk of being unable to pay the loan back on time. Lenders can’t just give you a loan without knowing something about you. That’s a bad situation for both sides, and an increase in defaults will be sure to follow. Even if the loan doesn’t ask you to prove your income, make sure to prove, in some way, that you can pay the loan back.
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