What is a no ratio loan?
All banks look at a borrower's income compared to their debt. This is called the debt to income ratio. For example, conventional mortgage guidelines call for a housing ratio of 36% and a total debt ratio of 43%.
Gross Monthly Income: $5,000
36% Housing Ratio: $1,800
43% Total Debt Ratio: $2,150
This would mean that on a conventional mortgage, this borrower cannot have a monthly housing payment higher than $1,800 and total monthly payments of $2,150.
These numbers vary by lender and can depend upon the strength of a borrower. A no ratio loan does not look at a debt to income ratio. The income is fully documented, but there are no qualifying ratios that the borrower needs to meet.
Some examples of why a no ratio loan would be used are for self-employed borrowers who have significant deductions on tax returns, borrowers who may have a significant amount of savings or borrowers who can only document part of their income.
If a lender is qualifying you on a no ratio loan, just make certain that you are comfortable with the payments. No ratio loans have a place and purpose, but they should not be used to stretch how much a borrower can qualify for.