No-Ratio Mortgage

No-ratio mortgage is a term for a specific kind of mortgage that does not use the standard qualifiers to determine if an individual qualifies for the mortgage.

No-ratio mortgage is a mortgage program in which a borrower's income isn't used or reported in qualifying the borrower for the mortgage. The loan is made based on the borrower's down payment, credit score or assets. Individuals who do not want to disclose their incomes or who have highly variable incomes favor no-ratio mortgages. In order to offset the extra risk incurred by the lender, no-ratio mortgages typically come with a higher interest rate than a mortgage that verifies income.

Self-employed individuals are the most prevalent borrowers of no-ratio mortgages. When an individual is self employed it can be more difficult to provide traditional income documentation. Self-employed individuals can have fluctuating income and are eligible for a variety of tax deductions. With a no-ratio mortgage, the lender doesn’t take into account an individual’s debt-to-income ratio. The tax deductions available to business owners reduce taxable income and paint an inaccurate picture of a self-employed individual’s earnings to the lender.

Instead, to qualify for a no-ratio mortgage, an individual will put down a down payment of 35 to 40 percent, and often have the funds to pay for a year’s worth of mortgage loan payments. It can be difficult to find a no-ratio mortgage, as larger banks and lenders no longer regularly offer them. Many people believe the proliferation of high-risk mortgages led to the crash of the subprime mortgage market in 2008. Since then, new regulations require more documentation from a borrower before they qualify for a loan, reducing the number of lenders that issue no-ratio mortgages.

No-ratio mortgages generally fall under the Alt-A classification.  Alt-A mortgages have a higher risk profile than the standard home mortgage, falling between prime and subprime. Lenders usually issue Alt-A loans to top credit quality borrowers with good credit histories. Historically, Alt-A loans have a reputation for high levels of default and are linked to the 2008 financial crisis.

Alt-A loans require less documentation, and leading up to the financial crisis in 2008, lenders issued Alt-A mortgages with greater regularity. With less income and employment information required, individuals qualified for loans they could not pay in the long term, eventually defaulting on these mortgages, leading to the collapse of the mortgage market. The Dodd-Frank Act introduced new regulations to counteract this area of weakness for the mortgage market.