No doc HELOC

What is a no doc HELOC?

A no doc HELOC is a home equity line of credit for people whose income doesn't come from a traditional job, like business owners, retirees, people receiving child support or anyone earning money from sources that don’t show up on a W-2.

In other words, you don’t need a traditional job to apply. Instead, lenders look at other factors to determine your eligibility, like your credit score, home equity and ability to repay. Some lenders also accept alternative forms of proof, such as investment or rental income, or even savings balances large enough to cover 12 to 24 months of payments.

Adam Hamilton, cofounder at REI Hub, which makes software for real estate investors, told us: "Contrary to the name, it doesn’t actually mean you don’t have to provide any documentation. Instead, lenders will closely evaluate things like your credit score and your home equity to decide what to offer you."

Examples of nontraditional income include:

• Child support
• Disability income
• Investment income
• Pension or Social Security payments
• Rental income
• Spousal support
• Trust distributions

Some lenders will also accept a savings balance large enough to pay 12 to 24 months' worth of payments as an alternative to income.

Like a traditional HELOC, you'll still need to demonstrate that you have equity in the property, a good credit score and an acceptable debt-to-income (DTI) ratio.

Not all lenders offer this type of loan. No doc HELOCs are more commonly available through nontraditional or alternative lenders, some of which are backed by private equity or other sources.

How to qualify for a no doc HELOC

Qualifying for a no doc HELOC is similar to qualifying for a traditional HELOC, except the income verification is more relaxed.

First and foremost, you’ll need to have equity in your home. The amount of credit you can qualify for is limited by the amount of equity in your property. Most lenders will lend up to 80% of the equity, meaning that if you have $200,000 in equity, you may be able to borrow up to $160,000. Some will lend up to 90% of your equity.

You’ll also need a strong credit score to qualify for a no doc HELOC. Most lenders require a score of at least 680. Higher scores improve the odds of your approval. The higher your score, the more likely you are to qualify — and the more favorable your terms will be.

Lenders will also want to see a DTI below 43%. This means that less than 43% of your income is being used to make loan payments. The lower your DTI, the more likely you are to qualify with favorable terms.

Lastly, you'll need to prove your income. No doc HELOCs have alternative ways of proving your income, but you'll still need to show that you can repay the loan. If you don't have traditional income, you can show income from sources such as Social Security payments, disability income or rental property income.

"You'll still generally need to provide proof of identity (such as a driver’s license or passport), authorization for a credit pull and documentation related to the property itself (like a recent appraisal or automated valuation model (AVM) report). You’d also probably be required to produce a bank statement or two to show liquidity, though not an extensive income verification," said Andreis Bergeron, vice president of sales at RedAwning, a platform for short-term rental owners.

No doc HELOCs work well for borrowers with assets or alternative income but not for those with no way to prove they can repay.

He went on to say: "HELOCs the old way, in contrast, go much further. You can expect to hand over a full accounting of your past two years of federal tax returns, W-2s, 1099s, complete bank statements (all pages, not just the summary) from the two most recent months, information on your long-term debt obligations and a great deal more."

» MORE: How to calculate home equity

Application process for a no doc HELOC

The application process for a no doc HELOC is similar to a traditional HELOC or mortgage.

1. Research no doc HELOC options: The first step is to research your options. Find out which lenders offer no doc HELOCs and compare terms like credit score requirements, maximum loan-to-value ratios, interest rates and closing costs.
2. Gather necessary information: It’s helpful to have all the information you need in front of you before you start your application. If you can’t find a list of what information you’ll need on the company website, contact the lender and ask.
3. Complete the application: When you are ready, complete the application with the lender. You'll submit all your personal information and documents at this time.
4. Wait for underwriting: After submitting your application, the lender will review it. During this time, the lender will likely conduct a home appraisal to verify the amount of equity you have. You may also be asked for additional documents during this time.
5. Sign your documents: When your loan is approved, you’ll need to sign the documents. Be sure you understand the terms of the loan, including how much the line of credit is, what the draw and repayment periods are, the interest rate and any closing costs.

The application process typically takes between two and six weeks. However, some banks specialize in processing loans quickly and can approve loans in just a few days.

» COMPARE: Best HELOC lenders

Pros and cons of a no doc HELOC

No doc HELOCs can help borrowers who don’t have traditional job income tap into their home equity. While this can be quite useful for those with nontraditional income, like retirees and business owners, these loans come with drawbacks as well.

Is a no doc HELOC worth it?

Yes, a no doc HELOC is worth it if you have significant home equity and nontraditional income, but you don’t qualify for a conventional loan. If that situation describes you, a no doc HELOC can help you access your home’s equity.

But if you have a steady W-2 income and qualify for a traditional HELOC, applying for a no doc HELOC might not be a good idea. Traditional HELOCs usually come with lower interest rates, fewer fees and wider availability.  If a low credit score or your DTI ratio is holding you back, consider waiting, improving your financial profile or exploring other options, like a cash-out refinance.