Levels of Documentation

Oct 11th, 2007 @ 9:52 AM by MortgageMentor

Despite the clever advertising, obtaining a mortgage is not an easy process. When you finally get to closing you have shared every bit of personal information with your loan officer, just short of a DNA sample. To be honest, I wouldn’t be surprised if DNA isn’t part of a mortgage application within ten years.

One of the complaints loan officers often hear from clients is that there is too much paperwork and lenders are too invasive. While this may be true to some extent, borrowers also have to look at it from the perspective of a lender. A bank is about to lend you hundreds, if not millions of dollars. Don’t you think they have a right to ensure that you are a good credit risk? Asking for a pay stub or tax returns is not unreasonable.

As a borrower, it is in your best interest to understand the categories of documentation for a mortgage. The more the lender can document the better your interest rates and financing options will be since there is less risk involved with the loan.

Full Documentation (Full Doc): The most common method is a full doc loan is where the borrower supplies the lender with everything needed to verify income and assets. Typically this includes but is not limited to the following: 30 days of pay stubs, two years of w-2’s, three month’s statements of assets. If you are self-employed, you will have to provide two years of tax returns and maybe tax returns for your business.

Stated Income/Verified Asset (SIVA): Stated income is where the lender verifies everything except the income you are stating on the mortgage application. You still have to be employed, but we don’t request a pay stub. Put another way, the lender takes your word for it. These loans are really designed for self-employed borrowers with good accountants or for borrowers with excellent credit to alleviate some of the paperwork.

Unfortunately, stated loans have been abused and improperly used by loan officers and consumers to get mortgages beyond their means and many of these loans have actually been made illegal as they have been blamed for much of the implosion of the mortgage market and foreclosures.

Due to the mortgage market correcting, SIVA (and all the other variations listed below) now require at least 10% down and 20% is usually preferred.

Stated Income/Stated Asset (SISA): Same as above, except the assets are also stated and not verified. You just have to show up with the required down payment and closing costs. Many borrowers with good credit and larger down payments may automatically have their loan switched to a SISA by lenders and the rates may be the same as a full doc loan. However, this is becoming rarer.

No Ratio: No income is stated or verified; hence the name “no ratio” since debt ratios cannot be calculated with out income. The lender goes off the strength of your credit and down payment. The rates and down payment required are slightly higher than that of stated deals.

No Doc: The lender does not verify ANYTHING. We don’t care if you have a job, income, or assets. As long as you can show up with the down payment and have excellent credit we can call it a wrap. These loans are also called NINJA loans (No Income, No Job, No Assets). Yes, the interest rates are very high.

Generally, you should always try to get your loan approved using full documentation standards as you will probably get better interest rates than you would with less documentation.