You run a mortgage company. You don't see yourself as some pencil pusher, tied inexorably to numbers and algorithms. You go with your gut. You trust your instincts. You basically see your persona in the mortgage financing world like that of a U.S. marshall in the Old West. Potential borrowers walk into your office. You like the cut of their jib. They just seem trustworthy to you. No need for ugly questions like "How much do you make?" or "What's your credit score?" or "Are you employed?" You just pull a sack of cash from under the counter and hand it over. They are off to buy their dream home. That's the fundamental structure of a no documentation mortgage. It bipasses the copious documentation usually necessary to get a mortgage loan.
As you might guess, it's not a well-regarded business practice. It was basically only popular for a short period of time...the brief era that ended with the mortgage meltdown and the financial crisis of 2007-2008. Basically, during the height of the mortgage boom, when originators could sell off any mortgage to "financial innovators" who packaged them into mortgage-backed securities (which in turn could get sold to suckers on Wall Street), mortgage originators couldn't crank out new loans fast enough. There was a race to get deals done as quickly and painlessly as possible.
Thus, the no-doc mortgage had its heyday. As we've suggested, it did not end well. These deals, which fall into a category of mortgages known as "Alt-A" (basically a short step above the dreaded "sub-prime" designation), contributed to the pool of toxic mortgage debt that nearly brought down the financial system in 2008. The subsequent economic crisis required a substantial government bailout to untangle everything.
It made no-doc mortgages dramatically less popular. It still comes up occasionally for specific cases, however, as in instances where people are self-employed or otherwise don't have standard documentation for their incomes.
Related or Semi-related Video
Finance: What is Interest Only Mortgage?17 Views
Finance allah shmoop what is an interest only mortgage Well
simply put it's when you only pay the rent on
the dough you borrowed you don't pay down the principal
you owe like if you have a three hundred thousand
dollars mortgage at six percent interest you're paying eighteen grand
a year to rent that money in six percent times
three hundred rands eighteen grand a year But the principal
you borrowed is likely due in thirty years So in
theory anyway if it were a normal mortgage you'd want
to pay down the principal little bit a month as
you go along like averaging ten grand a year in
principle pay down over thirty years That's times ten grand
right three hundred grand their total owning your home at
the end yeah yeah priceless that's what holmes work So
why would you want an interest only mortgage Well for
one thing the monthly payments or less so maybe you
could afford morehouse If on a thirty year three hundred
thousand dollar loan at six percent you're paying interest only
while you're writing a check each month for eighteen thousand
divided by twelve or fifteen hundred bucks maybe that's all
You can afford well the extra five hundred bucks arm
or you'd right toe pay down your principles Just not
something you can really do right now Maybe after three
years of scrimping and saving well you'll be able to
start paying down that principal reducing risk and making life
easier all the way around But right now you can't
afford it so the only thing you can do is
do the interest only dance Well the other reason you
might want an interest only mortgages that interest costs are
tax deductible Principal pay down costs are not so if
in a given mortgage payment of say eighteen hundred bucks
a month where three hundred of it is principal pay
down and fifteen hundred of it is interest well on
ly the fifteen hundred is tax deductible That three hundred
of pay down is not And if you're a forty
percent taxpayer the government is essentially picking up the tax
savings on the fifteen hundred times a forty percent at
six hundred dollars in interest You're paying such that they
quote feel unquote like the fifteen hundred is really only
about nine hundred a month in cost to you the
three hundred bucks and principal paydown feels like a full
three hundred dollars So some people seeking tio optimize their
tax deductions live in the world of interest only mortgages
and let the government for a change You know work 00:02:26.24 --> [endTime] for them How's that feel same all Take it
Up Next
What is a mortgage? A mortgage is a loan on property. Obviously not many individuals, or companies for that matter, can or want to pay cash for the...
What are the components of a mortgage payment? Mortgage payments generally consist of (4) components acronymed as PITI: Principal, Interest, Taxes,...
What is an Adjustable-Rate Mortgage (ARM)? An adjustable-rate mortgage is a mortgage that has a changing interest rate. Whatever it changes to is b...