Mortgage Matters: Gone are the days of no documentation and low documentation loans (column)
August 31, 2018
Once upon a time in a galaxy far, far away, there was such a thing as a "no documentation" loan.
What? That is not the making of a good story, but it is one I will tell my children when they are old enough to understand. Unless you have been in the real estate industry or have been financing properties since the early 2000s, you may not understand what I am referring to.
'No doc' loan
By a "no doc" loan, I am referring to a loan application for a residential mortgage that required no documentation. Yes, I mean that income and asset documentation were not required. While a Social Security number was technically on the loan application, a full credit report was not even in the file. A name, address and Social Security number were enough to get a loan.
“Lawmakers have taken massive measures over the past 10 or so years to ensure we would not go back to a point of limited documentation requirements from a borrower in order to qualify for a mortgage or residential real estate loan. The mortgage application process is now arduous and intense. No stone is left uncovered when it comes to fully documenting a borrower’s ability to qualify for and repay a loan.”
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Let's jump ahead from the early 2000s to the late 2000s. No documentation and low documentation loans were essentially deemed the root of the global recession and economic collapse — with good reason, I might add, but that is the subject for another column.
Now fast-forward to August 2018, and the current lending and regulatory environment. Lawmakers have taken massive measures over the past 10 or so years to ensure we would not go back to a point of limited documentation requirements from a borrower in order to qualify for a mortgage or residential real estate loan. The mortgage application process is now arduous and intense. No stone is left uncovered when it comes to fully documenting a borrower's ability to qualify for and repay a loan.
credit report required
So the point of this column is to outline in detail the documentation requirements all borrowers must adhere to when applying for a residential mortgage loan. For starters, a credit report is required for all individuals on the loan application. Therefore, the loan officer needs to obtain full names, Social Security numbers, dates of birth and current addresses.
Next comes the employment and income documentation. At a minimum, a full two-year history of employment and income is verified and documented, starting with two full years of personal tax returns and all business tax returns for which there is greater than 25 percent ownership as outlined on K1s.
All pages and schedules of the returns are required, along with accompanying W2s, 1099s and K1s. Two most recent year-to-date paystubs and a year-to-date profit and loss statement (where applicable) also need to be provided. Depending on the nature of the income (i.e. commission, salary, bonus etc.), more paperwork may be needed to establish earnings.
Money in the bank has to be verified for both down payment and costs to close the loan. Funds in the bank need to be verified for excess housing reserves for all properties owned post-closing. Two months of all asset statements with all pages of the statements are needed. As well it needs to be noted that all non-payroll-type deposits in excess of 25 percent or perhaps 50 percent of the borrower's gross monthly income will have to be detailed to ensure that they are from a permissible source.
Documentation of the overhead on all real estate owned is necessary, along with copies of the borrower's identification and signatures on preliminary loan disclosures. Written authorization to proceed from the borrower(s) and full real estate contracts and all applicable amendments (if applicable) are also mandatory requirements.
The regulatory pendulum has swung, so to speak. But those of us who have been making our living navigating both ends of the pendulum are well-versed with how to successfully close loans and work through the regulatory process.
William A. DesPortes works for Central Rockies Mortgage Corp. He can be reached at 970-845-7000, ext. 103, and email@example.com.