Construction Loans CA

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Loan Types

Useful Info

 

Reduced & No Documentation Construction Loan

The type of financial documentation that is required to qualify for a loan depends upon the type of loan program that you select. The different levels of documentation are generally referred to as:

• Full Documentation
  
• Reduced Documentation
  
• No Ratio
  
• No Documentation
  
• Full Documentation

Also known as "Verified Income, Verified Assets", this is the highest level of documentation that lenders require to verify a borrower's assets and income. This level of documentation offers the lowest interest rates because the risk that the borrower will default is low. Full documentation means that you will have to provide documentation to verify income and assets sufficient to qualify for the loan.

Income verification for wage earners will usually require concurrent W-2s for two years and the two most recent, concurrent pay stubs. Self-employed borrowers will usually need to provide tax returns for the last two years, a current profit and loss statement and a business license. Asset verification will require two months of concurrent bank statements showing the required reserves of principal, interest, taxes and insurance ("PITI"). For example, if your monthly PITI is $2,600, then you will need to provide bank statements showing a minimum balance of $5,200 in liquid assets for the most recent 2 months.

Reduced Documentation

Reduced documentation loans do not require the borrower to produce documentation to verify income or assets. When income or assets are stated on the application but not proved with documentation, the loan is referred to as a "Stated Income, Stated Assets" loan. Reduced documentation loans are desired for different reasons. Self-employed people may have difficulty verifying their income because of tax deductions that reduce the actual income or profit from their business. A reduced documentation loan is the solution. Other people choose reduced documentation because of privacy concerns and some people do not want to go to the trouble of locating the documentation to support their income and assets. Some lenders offer reduced documentation loans to wage earners. This is because the borrower may have supplemental income that cannot be documented. For example, the wage earner may have income from a boarder, a side business or loans that were made to family or friends. The availability of reduced documentation loans depends upon the borrower's credit score. The higher the score, the less the documentation that is required by the lender.

No Ratio

Loan qualification typically depends upon your debt-to-income ratio or "DTI". Lenders generally require that your DTI to be 50% or below in order to qualify for a particular loan. When a borrower applies for a "No Ratio" loan, income is left blank on the application. The lender waives the DTI requirement for the loan and although income is not stated or verified, proof of employment is required. A lender assumes a higher risk of the borrower defaulting on a "No Ratio" loan and therefore the interest rate for this kind of a loan will be higher.

No Documentation

In certain situations, loan programs are available that do not depend upon your income or assets. The employment, income and asset sections of the application are left blank and no supporting documentation is provided. These programs are generally available when you have equity in the land and/or you are making a down payment that makes lending less of risk.