The thinking and theory behind no doc loans was relatively sound in the early 2000s when the practice was at its peak.
This was an outlet that gave self employed individuals and people with highly fluctuating annual income a chance to own a home, giving them the same opportunity afforded to those on stable incomes.
When the Global Financial Crisis (GFC) of 2008 hit, this economy based on dubious and risky lending practices through sub prime lending and loans of the no doc profile suddenly came under major scrutiny.
Today, this is an avenue that is either not available through many mainstream outlets, or it has been repackaged with stronger regulations.
Given the financial pain that was caused 10 years previously where communities are still recovering from poor financial choices, this is a practice that continues to be maligned by lenders who are cynical and cautious about who they lend to.
Let us discuss the rationale behind this fear, walking through the merits of the practice in principle.
Interest Rate Rise
To give no doc loans to individuals that are self employed, brokers and lenders in this industry require a higher interest rate to validate the process. Due to the fact that the client is bypassing the regular model that sees minimal checks and balances put into place, this is a means of insurance for brokers who are covering their own lending policy. The natural conclusion for lenders who offer loans at a higher interest rate are more people who are unable to pay that loan back.
Banking fees are a dubious exercise for any profile of loan where the reasoning and rationale is questionable to say the least. This practice can be inflated to a higher degree when it concerns no doc loans, as brokers are left to their own devices. They can feel empowered to make those decisions because of the nature of the flexible lending.
A deposit is part and parcel of any lending practice in the banking sector, but the higher degree of risk involved with no doc loans sees that figure inflated. Having money down on the table is a necessary step forward, but individuals seeking a shortcut may find themselves exposed to the first installment.
Traditional Home Loans Still Available
For those who were of the opinion that no doc loans were the only means of accessing a home loan, that is simply not the case in 2018. Granted there will be additional loopholes and paperwork to be carried through before one could potentially be approved, but the means of obtaining a loan are still legitimate from providers who run a check on high variable income and self-employed individuals. This is one of the central reasons why the no doc option is so maligned, because it is a means of bypassing the traditional route when that is not entirely necessary, adding extra risk to a proven process.
Lack of Support During Emergencies and Defaults
Due to the fact that no doc loans are now considered outside of the mainstream for most lending providers, there is a void of support structures and networks in place to protect the borrower in case of default or emergency. The banking ombudsman is in no position to step in and provide assistance, leaving the borrower isolated and completely vulnerable. Examples in this scenario have seen individuals file for bankruptcy, loosing their livelihood over a contractual matter that can be labeled as entrapment in some cases.
Mortgage lending through no doc loans ultimately are enacted as a result of the housing industry at large. When consumer confidence is high and the government wants to entice this sector, there could be a relaxation of the rules and guidelines in this field.
However, the cases of bankruptcy and fraud have been enough to warrant a change in lending behaviours where providers have to do their due diligence. Even if that results in self employed and highly variable income citizens not being afforded the same opportunities as their peers, that is a price lenders are willing to pay.