One of the causes cited for the subprime mortgage crisis has been the abuse of no doc equity loans. Since a restructuring of the verification procedures involved with equity borrowing policy has become much stricter, and these rates have begun to fall alongside the fall of the fixed year mortgage rates. The difference between a no documentation mortgage and a stated mortgage is in the amount of information provided by the borrower and the consequent amount of interest rates. An equity mortgage is when the borrower includes the house or property for which funds are being lent, as collateral and agrees to a maximum repayable amount and a repayment period. For a stated loan your income, employment, credit, and associated financial standing are all verified for qualification for a home mortgage. For a no doc, or no documentation mortgage your income is not included whatsoever, and only your employment is verified. This is a helpful avenue for those that work for tips and independent contractors or any professional that has a hard time accurately analyzing the total value of their income.
In addition to employment verification, a no documentation borrowing must also require a 5% down payment and evaluation of credit score. Technically, a no doc equity lending is much harder to qualify for than a traditional stated lending, but on the other side there is no required inclusion of tax documents or net assets, and the approval and associated mortgage processing is much faster than a stated lending. Additional differences include higher interest rates for no documentation and shorter term periods. Because these can potentially incur much more debt, it is better to use them for larger purposes than mere desires such as educational expenses, medical bills, or home improvements.
Remember that you are on an equity line, or essentially, using up the value of your home or property when using funds from the maximum loan amount. Because of the avoidance of your income and employment particulars, your interest rates are much higher and subsequently so are you subsequent monthly payments the higher the amount you borrow.
These are similar though not equal to pay day loans, which people can use to receive smaller amounts within a business day to supplement the time between paychecks. These typically have shorter repayment periods and require no collateral, but only grant up to $1,500 at a time. These also have a greater effect of credit score if defaulted in proportion to the amount of time it actually takes to default. But it would be wasteful to supplement lack of income with a no doc equity loan.