I have detailed in past columns the importance of mortgage applicants supplying their lender or broker with relevant income and asset documents when they are requested. Depending on an individual’s background, these documents can include recent pay stubs, W2 forms, tax returns, bank statements, HUD-1 settlements, and payoff letters for collection accounts. By including copies of these personal documents with an application, the applicants personal profile would be fully documented, hence the industry term “full doc” mortgage. From a lender’s point of view, the more that it knows about an applicant, the more comfortable it is offering the most favorable rates and terms. At the other end of the spectrum is a borrower whose income is in cash. In this case, there is no paper trail verifying that the individual makes enough to support a mortgage payment and any other debt appearing on their credit report. Without the documents necessary to demonstrate to the lender the ability to make the payments, the applicant can apply for a “no-doc” mortgage loan in which the lender only looks at a credit report. The applicant does not disclose anything about employment, income, or money in the bank. Because the lender has only the credit report to hang their hat on, they will have strict credit score requirements according to the loan to value (LTV). For instance, if the credit score lies between 620 and 660, a 20 percent down payment is required. Credit scores ranging between 660 and 680 will require a 10 percent down payment. If the credit score is at or above 680, then the lender will only require 5 percent down. Lenders consider these no-doc loans riskier and so will charge a higher interest rate. Consider the following example of a client whose situation did not fit either full or no-doc. A self employed individual with a credit score of 730 approached me for help in financing the purchase of his primary residence. At our first meeting, he told me that he made $250,000 last year and was doing even better this year. Considering his low debt and a healthy bank account, at first glance this appeared to be a full doc mortgage scenario. When we next met and I looked through his tax returns, I learned that, after business expenses, his adjusted gross income, showed only $75,000. The lender would only consider the adjusted gross income for this individual, a figure that falls far below what is necessary to qualify for a full doc mortgage loan. Rather than putting my client into a no-doc loan with a high interest rate, I advised him to disclose to the bank his strengths (credit and assets) and not do disclose his weakness (low adjusted gross income). This can be done through a stated income, full asset loan. In structuring such a loan, the borrower provides documentation of assets in the form of bank statements while simply stating his employment information and income without documenting it. By doing so, the borrower will obtain a rate much preferable to the no-doc loan. The lender will usually make a phone call to confirm employment status but will not ask about income. Obviously,
the whole picture needs to make sense to the underwriter. Regardless
of the type of loan, borrowers should be wary of a mortgage broker
who sees the lack of documentation as a license to put anything
on the application. Remember, by signing the application, the borrower
acknowledges the veracity of the information submitted. |
