Question: My wife and I are 58 years old and I was recently laid off from a telecommunications company. We are moving out of the area to a smaller town and I'd like to find a local job. We are under contract to purchase a new home for $200,000. Our current residence is sold and scheduled to settle in January. We will net about $150,000 from the sale. Our plan is to put down $120,000 and obtain a mortgage for $80,000. We have good credit and about $25,000 in savings and another $270,000 in retirement savings.

We have heard about "no doc" loans and wonder if that's the best type of mortgage in this situation.

Answer: Actually, your situation is perfect for a "no doc" loan, or as they are called in the industry, financing with "no income verification" (NIV).

An NIV loan is designed for folks who cannot or will not provide income documentation to the lender to support the loan amount requested. Lenders look at three basic criteria when evaluating a mortgage application.

First, they look at the borrower's collateral and the down payment. Lenders like a large down payment because they know borrowers are statistically less-likely to default when a property is secured with substantial equity.

Remember that if a homeowner defaults on his loan, the lender can foreclose on the property. If the borrower has tens of thousands of dollars in equity in the home, he or she is likely to take the necessary steps to prevent foreclosure and preserve equity.

Second, lenders look at the credit history of the borrower. In a nutshell, lenders like to see a timely payment history by the applicant. A strong payment history is a good indication that future payments will be timely.

Third, lenders will look at the borrower's ability to service the loan payments. This is where you may run into trouble. Because you are unemployed, you technically have no monthly income to make your mortgage payments. As a general rule of thumb, lenders like to see a total mortgage payment not exceed about 33 percent of your gross monthly income. Your new monthly payment on an $80,000 loan, including taxes and insurance, will be in the range of $675 per month. This means a lender would like to verify an income of about $25,000 per year.

If this amount of income cannot be verified through dividend and interest income from your savings, you may have to opt for an NIV loan.

This actually isn't so bad. Because your income cannot be verified, you are statistically a higher credit risk to the lender. To offset this risk, lenders offer NIV loans that carry a slightly higher rate.

Expect to pay about a 3/8ths of a percent more on a 30-year fixed rate mortgage. For an $80,000 loan, this amounts to only about $20 more per month.

While I'm on the subject, however, I might as well state my thoughts on this subject. If I had my way, I'd change the way lenders underwrite these types of mortgage loans. Even though the difference in payment is only $20 per month, it seems to me that your type of situation warrants the most competitive terms available. Let's look at your situation objectively:

• You're putting down $120,000 on a $200,000 purchase price. This means you are looking for a loan amount that is only 40 percent of the property's value.

• You have a history of good credit.

• You have savings accounts that are equal to almost four times the mortgage requested.

Does any reasonable lender honestly think that this loan has a higher chance of any other loan to go into foreclosure? I would be grateful if someone would enlighten me.

For more articles by Henry Savage, please press here.

Published: December 19, 2001

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