Alternative Documentation

What Is Alternative Documentation?

Alternative documentation is a documentation process designed to expedite loan approval where the lender accepts certain documents from the borrower as verification of income made on the loan application.

Understanding Alternative Documentation

Typical documentation for loans consists of tax returns or the submission of documentation that is verifiable with a third-party service. Alternative documentation involves the borrower providing an assortment of financial documents that may include W-2s, paycheck stubs, and bank statements. This type of loan is sometimes referred to as an Alt-A loan, although some lenders may also have their own names for these loans.

Alternative documentation loans are often offered only to those with very good credit. The decision is heavily dependent on the applicant's credit score. These loans often offer more flexibility than conventional, traditional loans.

Alternative documentation loans might be a good option for borrowers with special situations, such as the self-employed or recently divorced. The lender accepts the documentation the borrower provides, without necessarily needing to go through a time-consuming process of verifying all of the information. Confirming a borrower's information in this manner is considerably quicker than the traditional method of verifying such information with third parties.

Alternative documentation loans became popular in the aftermath of the 2008 financial crisis. There are a number of reasons for this. They offer a much simpler closing process as compared to traditional loans. Alternative documentation loans also appeal to freelancers, an income group whose share of the economy has increased since the crisis. The passage of the ability-to-repay rule, which allows lenders to make good faith loans based on their assessment of the borrower, also facilitated the rise of alternative documentation loans.

Alternative Documentation vs. SISA Loans

Alternative documentation is a full documentation loan. In other words, income, assets, employment, and other financial information is documented using some form of official paperwork. The documentation needed will vary depending on the requirements of the lender and possibly the underwriter.

This is in contrast to a stated income stated asset (SISA) loan. SISA loans are also known as no income-no asset (NINA) loans or no-documentation loans. In the recent past, SISA loans were also dubbed "liar loans," as they were popular with those who wanted to obtain loans and other financing by providing false or misleading information. Many experts blamed the volume of what are known as liar loans as a major factor contributing to the mortgage crisis of the last 2000s. In wake of the mortgage crisis, lenders and regulators implemented stricter rules regarding SISA loans, so borrowers may find it more difficult to obtain a loan via this process now.

Despite their rocky history and their role in the mortgage meltdown, SISA loans do have some legitimate uses and make sense for borrowers in certain situations. They are popular with self-employed people or business owners, who often write off as many expenses and other allowed deductions as possible, which can make their income appear deceptively low.

There is generally no increase in the interest rate associated with alternative documentation as there typically is with "stated" loans.

Example of Alternative Documentation Loans

Francois wants to buy a home. But he is a freelancer, unable to qualify for the necessary conditions for a traditional home mortgage. Instead, he opts for an alt-doc loan. To become eligible for the loan, his broker asks him to provide documentation related to the registration of his business as well as bank statements from the last five years. Francois is also required to produce bank statements for his business and additional sources of income, such as investments.