Loan Programs
What's up Doc?
By Dan Smith

What’s up Doc?

This month I wanted to cover the different documentation options available, and the pitfalls and advantages associated with each type. Most borrowers have salaried jobs, with easy to document incomes. A simple copy of a pay stub and recent W-2 are usually enough to verify your employment. However, there are times and types of borrowers where standard forms of documentation simply won’t get the job done.

For many borrowers a “Stated Income” form of documentation is the best option. In cases where one or both borrowers are self employed, or anyone for whom providing tax returns would either be inconvenient or impractical, this option is the most common solution offered. In essence the borrower(s) simply lists his or her income on the loan application, but the mortgage company does not verify the accuracy of that amount. They will however, verify the employment listed is current. For self employed individuals, that generally means getting a letter from a CPA or a copy of their business license, to confirm they have been self employed for at least the last two years. For salaried individuals that means a phone call to the employer listed, to confirm that individual is still employed.

The advantages of this type of documentation are obvious for the most part. In fact, most mortgage companies have this option available at no additional cost to borrowers with appropriate credit (FICO) scores. The only disadvantage for some applicants is that they may need to list an income substantially above current realities in order to qualify. Most loan officers will work with you to determine if the amount you “state” is enough to qualify. However keep in mind that there is nothing wrong with listing new sources of income. A raise that starts in the next few months, a new bonus program or enhanced commission scale, or a new contract for a self employed individual that will add substantially to the company’s revenue, are certainly valid examples of “stated” income contemplated by the mortgage industry under this type of documentation. So let your conscience be your guide here.

For borrowers that don’t want to “state” an income to qualify, a “No Ratio” form of documentation may be the better choice. Under these guidelines you must still indicate your employment on the application, but you get to leave the income section blank. The CPA letter or phone verification of that employment still occurs from the lender side. The advantage here is that there is no need to stretch the “stated” amount of income in order to qualify, while still maintaining all the remaining advantages of a “stated” program. The downside is that there is usually a substantial price adjustment of .25% to .5% in rate, to get the “No Ratio” option. Having a substantial down payment and high FICO scores will help mitigate this pricing difference, but not entirely.

Finally, there is the “No Doc” option of documentation. As the name applies, no form of verification whatsoever is required relating to one’s income or source thereof. The loan application is left blank in the employment and income sections altogether. In fact on most of these types of loans no assets are required to be listed either. If you can fog a mirror and have the right FICO scores, you can easily find financing options up to 95% of the purchase price (or value) of the home. As you might also expect, the up charge for this kind of program is more expensive than either of the previous two options, ranging from .25% to 1.5% in rate. This is the loan of choice for borrowers between jobs, with foreign or difficult to document sources of income, or even someone who just need to temporarily qualify for more than one home.

With all of these choices, you need to be careful which lender you choose. Do they have access to all three types of documentation options, and do they offer them on a wide variety of programs? Prices vary quite substantially between lenders for these products. So a lender that has lots of choices usually means you will get a better price on the product you want. Also be aware that whenever you use one of these reduced documentation options, lenders will scrutinize the remaining facets of the file more intensely.

For more information, or to find out if you qualify for a reduced documentation option on your next loan, call the expert. Dan Smith can be reached at Bank of the West at 303-674-2205, or visit his website at www.ColoradoHomeLoans.com !


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