What is a No Ratio Loan? Ultimate No Ratio Mortgage Guide

no ratio loan

In the world of mortgage financing, a “no ratio loan” emerges as a unique and flexible solution, especially for those with non-traditional income streams.

This type of loan sidesteps the conventional debt-to-income ratio assessment, opening doors for a diverse range of borrowers.

In this guide, we’ll delve into the intricacies of no ratio loans, unraveling how they differ from standard mortgage options and illuminating their potential benefits and considerations.

Whether you’re self-employed, a seasonal worker, or simply seeking a mortgage that aligns with your unique financial landscape, understanding no ratio loans could be your first step towards informed homeownership.

Firstly, what is a no ratio loan?

A no ratio loan is a mortgage that does not require any calculation of the borrower’s debt-to-income ratio (DTI).  Quite simply, there is no verification of employment or income required.  This approach is appealing to self-employed individuals with complex or unconventional income sources, or borrowers who have financial privacy concerns.

This type of mortgage is only offered by alternative lenders known as non-qualified mortgage (non-QM) lenders, which specialize in offering creative, outside-the-box loan solutions.  

The main highlights of the no-ratio mortgage include:

  • No DTI calculated
  • No income documentation required
  • No income calculation required
  • No employment verification required
  • Only applies to owner-occupied residential properties, i.e., primary residences or second homes
  • Not available for investment properties
  • Available for single-family residences, PUDs, townhomes, condominiums, 2-4 units (as long as one of the units is owner-occupied), and even special property types including modular, rural, log homes and large properties up to 10 acres.
  • Available for purchase, rate-and-term, and cashout refinance transactions
  • Available for U.S. citizens, permanent resident aliens, and non-permanent resident aliens

It’s also important to note that while these loans offer a unique avenue for mortgage approval, they might come with different terms and conditions compared to traditional loans, such as potentially higher interest rates or stricter credit score requirements.

Can you get a jumbo no ratio loan?

Yes, jumbo no ratio loans are available up to $2 million for purchases and refinances.  In 2024, the conforming loan limit is $766,550 for single-family residences in most counties.  Therefore, if you’re looking for a loan amount between $766,551 and $2 million, consider getting a jumbo no ratio loan.

A jumbo no-ratio loan is particularly beneficial for high-net-worth individuals who may have significant assets but prefer not to disclose their income or for those whose income might not qualify under traditional loan standards.

This option also opens up opportunities for borrowers seeking luxury homes or expensive properties in high-cost areas.

However, it’s important to understand that the lender will likely require a higher credit score, substantial assets, and a significant down payment to mitigate the risk associated with the larger loan amount. 

How no ratio loans differ from traditional mortgages

No ratio loans stand apart from traditional mortgage options. The fundamental difference lies in the assessment of the borrower’s income and debt

In traditional mortgages, a key factor in determining eligibility is the borrower’s DTI ratio. This ratio measures the percentage of a borrower’s monthly gross income that goes towards paying debts. Lenders use DTI to gauge the borrower’s ability to manage monthly payments and repay the loan.

No-ratio loans, on the other hand, do not require borrowers to disclose their income or debt levels. This means that the DTI is not calculated or considered during the loan approval process.

Typically, traditional lenders require a DTI no greater than 43-45%.  This is difficult for many individuals to satisfy, especially if their tax returns show relatively low income.  By applying for a no-ratio mortgage, the borrower avoids having to satisfy any DTI requirements.

no ratio mortgage

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No ratio loan requirements

If you apply for a no-ratio loan, the focus shifts from income and employment verification to three main factors:

  1. Down payment
  2. Credit history
  3. Assets (reserves)

We analyze each of these main no ratio loan requirements in turn.

No ratio loan down payment

The no ratio loan down payment is a key element in the application process.

Unlike traditional loans, where the down payment can sometimes be lower, no ratio loans often require a larger down payment. This is because the lender is taking on more risk by not considering your income or DTI ratio. A significant down payment demonstrates your commitment and financial capability, providing reassurance to the lender.

If you’re looking to purchase a property under the no-ratio program, here are some typical down payment requirements to expect:

  • 20% down payment (requires 720 credit score and 24 months of reserves)
  • 25% down payment (requires 680 credit score and 18-24 months of reserves)
  • 35% down payment (requires 660 credit score and 12 months of reserves)

In the context of refinances, the equivalent “skin in the game” factor is the loan-to-value (LTV).  Here are some typical refinance LTVs to expect under the no-ratio program:

  • 65 to 80% LTV for rate-and-term refinances depending on credit score
  • 60 to 70% LTV for cash-out refinances depending on credit score

Please note that the maximum LTVs listed above can be subject to special caps, such as for condominium loans, interest-only loans, and loans for properties in declining markets.

Potential borrowers need to be prepared for these requirements and plan their finances accordingly.

Credit history

Since your income and employment are not being analyzed at all, a strong credit history is paramount.  Lenders will scrutinize your credit report to assess your reliability in managing and repaying debts.

Most no-ratio lenders require a minimum credit score of 660, regardless of whether you’re looking for a purchase loan or a refinance.

Your credit score is only part of the equation.  The lender will typically also have these credit requirements:

  • No 30-day mortgage late payments in the past 12 months
  • No foreclosures in the past 7 years
  • No short sales or deed-in-lieu in the past 4 years
  • No bankruptcies in the past 4 years

In short, a relatively high credit score and blemish-free credit history are more critical in no-ratio loan applications, as they are indicators of the borrower’s history of managing credit responsibly.

Assets (reserves)

Under the no-ratio program, the lender will closely examine the borrower’s assets to ensure sufficient financial stability beyond the closing table.

At a minimum, you’ll be required to have at least 12 months of reserves.  If you would like higher LTV and/or interest-only payments, your reserve requirement may increase to 18 or even 24 months.

Therefore, as a tradeoff to not having to document your income or employment, you’ll need to show the lender you have enough assets to make 12 to 24 months of payments.

As an important caveat, for cash-out refinances, the cashout proceeds from the loan may be used toward the reserves requirement, as long as you have the first four months of payments coming from your current assets.

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Pros and cons of no ratio mortgage loans

Understanding the advantages and disadvantages of no ratio mortgage loans is crucial for anyone considering this type of financing.

Pros of a no ratio mortgage

Advantages of no ratio mortgage loans include:

  • Flexibility for Non-Traditional Income Earners: Ideal for self-employed individuals, freelancers, or those with irregular income, as income verification is not a requirement.
  • Simplified Application Process: Without the need to verify income or calculate DTI, the loan application process can be more straightforward and less invasive.
  • Higher Approval Chances for Certain Borrowers: Those with strong credit histories and substantial assets but irregular income may find it easier to get approved for a no ratio loan compared to a traditional mortgage.
  • Privacy: For borrowers who prefer not to disclose their income, no ratio loans offer a level of privacy not typically available with traditional loans.
  • No Prepayment Penalties:  Because these properties are owner-occupied, there can be no prepayment penalties, meaning you can pay off your loan early (by selling or refinancing) without incurring hefty fees. 

Cons of a no ratio mortgage loan

However, there are disadvantages to consider:

  • Higher Interest Rates: Lenders often charge higher interest rates for no ratio loans due to the perceived higher risk without income or employment verification.
  • Larger Down Payment: These loans usually require a larger down payment (or a lower LTV in the context of refinances), which can be a barrier for some borrowers.
  • Limited Availability: Very few lenders offer no ratio loans, and those that do may have stricter eligibility criteria.
  • Potential for Overborrowing: Without income checks, there’s a risk of borrowers taking on more debt than they can comfortably manage.  To counter this, the no-ratio loan requires at least 12 to 24 months of post-closing reserves.

When to consider a no ratio mortgage loan

Deciding whether a no ratio mortgage loan is the right choice depends on your unique financial situation.  Let’s explore when it might be appropriate to consider a no ratio mortgage loan.

Self-employed

For the self-employed and small business owners, no ratio loans can be a game-changer. Traditional mortgage applications can be cumbersome due to fluctuating income and the need for extensive documentation (2 years of tax returns, paystubs, etc.). No ratio loans eliminate these hurdles, making the process smoother.

If you’re looking for a self employed mortgage in Florida, we can help you explore the no-ratio loan and other programs tailored for self-employed borrowers.

Volatile/irregular income

Individuals with volatile or irregular income (such as seasonal or gig workers) often face challenges in securing traditional mortgages. No ratio loans provide a solution by not requiring any income verification at all.

Real estate investors

While the no-ratio program is unavailable for financing rental investment properties, it can be a good solution for real estate investors looking to purchase or refinance their primary residence or second home

Real estate investors who own several rental properties often have artificially low income on their tax returns due to the various write-offs.  They can therefore benefit from the no-ratio program.  

Also, because no-ratio lenders are non-QM lenders, they allow the borrower to simultaneously have up to 20 mortgages.   For example, if the borrower already has 10 rental investment properties, each with its own mortgage, they can apply for an 11th mortgage through the no-ratio program.

Recent Career Changes

Individuals who have recently become self-employed or switched to a job with a variable income might find no ratio loans more accessible.

Retirees

Retirees who have a substantial asset base but limited monthly income can use no ratio loans to finance their homes.

what is a no ratio loan

Learn how the no-ratio program may be the right fit for you.

Typical no ratio loan rates

Due to the perceived higher risk by lenders, as income is not verified, no ratio loan rates are typically higher compared to traditional mortgages.

To help take the sting out a little, here are some factors that may lower the rate you’re offered:

  • The lower the LTV, the better your interest rate will be.  For a purchase, if you can make a higher down payment, the tradeoff in the rate may be worth it.
  • The higher your credit score, the lower your rate will be.
  • Cash-out refinances typically come with higher rates compared to purchases and rate-and-term refinances.
  • Of all property types, single-family residences have the lowest rate; the rate increases for condominiums, particularly non-warrantable condos.
  • If you opt for interest-only payments instead of principal-and-interest payments, your rate will be higher.
  • The more reserves you can show (beyond the minimum requirements), the more wiggle room you have to negotiate a better rate.

Understanding these factors can help you better prepare for the financial implications of a no ratio loan and budget accordingly. 

The application process for no ratio loans

Navigating the application process for no ratio loans can be markedly different from that of traditional mortgages. Understanding this process is key to a smooth and successful application.

Here’s a general outline of what to expect:

  • Initial Consultation: Start with a consultation with your lender or mortgage broker. This is an opportunity to discuss your financial situation, understand the specifics of no ratio loans, and determine your eligibility.
  • Credit and Asset Review: Although income and employment verification is not required, lenders will closely examine your credit history and assets. Ensure your credit report is accurate and be prepared to provide comprehensive details about your assets.
  • Property Appraisal: The lender will require an appraisal of the property you intend to purchase. This appraisal is crucial in determining the loan amount and ensuring the property’s value aligns with the loan. (For loan amounts greater than $1 million or $1.5 million, the lender may require 2 appraisals.)
  • Documentation: While income and employment documentation is not needed, you will still need to provide identification, a credit report, and asset statements.
  • Loan Application Submission: Once all the necessary documents are gathered, you’ll submit your loan application. Ensure all information is accurate and complete to avoid delays.
  • Underwriting Process: The lender will then begin the underwriting process. This involves verifying the provided information and assessing the risk associated with the loan.
  • Approval and Closing: If the loan is approved, you’ll move forward to the closing process. This includes signing the loan agreement and handling any final paperwork.
  • Funding: After closing, the loan is funded, and you can proceed with the purchase or refinance of your property.

Our no ratio home loan success stories

At DAK Mortgage, we’ve had the privilege of helping numerous clients get a no ratio home loan.  Here are some success stories that highlight the effectiveness and versatility of this loan program:

Key West dream home refinance

Our clients in Key West faced a challenge when they went over their construction budget for their dream home.  They needed to refinance quickly, as their private construction loan was about to balloon.  With one borrower furloughed and the other having a high DTI, traditional refinancing options were off the table. We introduced them to the no-ratio program, which perfectly suited their situation. Without the need for income verification or DTI calculation, we secured them a 5/6 adjustable-rate mortgage (ARM), significantly reducing their interest rate. Read more

Miami penthouse purchase for a retired investor

A retired real estate investor from Los Angeles sought to purchase a penthouse in Miami Beach but couldn’t show income through tax returns due to his recent retirement. Utilizing the no ratio program, we facilitated the purchase without income or employment verification, closing the loan at 75% loan-to-value. This unique loan program enabled him to enjoy his retirement with stunning ocean views in Florida. Read more

California freelancer’s Miami condo purchase

A freelancer looking to move from California to Miami found the perfect condo but faced challenges in showing steady income. The no-ratio program came to the rescue, requiring no proof of income or employment verification. We closed her loan at 75% loan-to-value, helping her transition to a vibrant Miami lifestyle. Read more

Simplifying life in Miami

A client wanted to downsize in Miami during the COVID-19 pandemic but struggled with loan approval due to a high DTI and varied job history. The no ratio program provided a solution with no income verification. We secured a 30-year fixed interest rate loan with 65% loan-to-value, turning her dream of homeownership in Miami into a reality. Read more

These stories exemplify the power of the no-ratio loan program in helping diverse clients achieve their homeownership goals, even in challenging financial circumstances.

Use DAK Mortgage to access no ratio loan lenders

Navigating the world of no-ratio loans can be complex, but with DAK Mortgage, accessing the right lenders becomes a streamlined and supportive process.

We specialize in no income verification mortgage programs.

For no-ratio loans in particular, working with a mortgage broker is critical.  Only a handful of lenders in the United States are properly certified to offer this special type of loan.

no ratio mortgage loan

Work with an experienced mortgage broker familiar with no-ratio loans.

Key takeaways

Here are the essential aspects to remember about no-ratio loans:

  1. Advantages: These loans are particularly beneficial for individuals with non-traditional income sources, such as self-employed professionals, freelancers, or those with fluctuating earnings. They offer flexibility and privacy, as they do not require income or employment verification or debt-to-income ratio calculations.
  2. Considerations and Requirements: While no ratio loans provide an alternative route to financing, they often come with higher interest rates and require a larger down payment. A strong credit history and substantial assets are crucial for approval.
  3. Ideal Scenarios for No Ratio Loans: This loan type is especially suitable for borrowers who might struggle with traditional loan requirements due to irregular income patterns or privacy concerns regarding their finances.
  4. Limited Availability:  Only a handful of lenders in the United States have the proper credentials to offer this program.  Working with a mortgage broker will help you identify these lenders.

No ratio loans represent a significant opportunity for many potential borrowers. By understanding their nuances and requirements, and with the right guidance, these loans can be a powerful tool in achieving your property ownership or investment aspirations.

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