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Why are Lenders documentation Requirements so complex Answer |
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Mortgage Terms Answer |
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Why are Lenders documentation Requirements so complex |
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A lender's "documentation requirements" stipulate how information
about income and assets must be provided by the applicant, and how it
will be used by the lender. The most important of the documentation requirements are as follows:
Full documentation: Both income and assets are disclosed and
verified, and income is used in determining the applicant's ability to
repay the mortgage. Formal verification requires the borrower's employer to verify employment and the borrower's bank to verify deposits.
Alternative documentation, designed to save time, accepts copies of the borrower's original bank statements, W-2s and paycheck stubs.
At one time, full documentation was the rule and it remains the
standard. In recent years, however, other documentation programs have
grown in importance.
Stated income/verified assets:Income is disclosed and the
source of the income is verified, but the amount is not verified. Assets are
verified and must meet an adequacy standard such as, for example, 6 months of stated income and 2 months of expected monthly housing expense.
Stated income/stated assets:Both income and assets are
disclosed but not verified. However, the source of the borrower's income is verified.
No ratio: Income is disclosed and verified but not used in qualifying the borrower. The standard rule that the borrower's housing expense cannot exceed some specified percent of income, is ignored. Assets are disclosed and verified.
No income:Income is not disclosed, but assets are disclosed and
verified, and must meet an adequacy standard.
Stated Assets or No asset verification:Assets are disclosed but
not verified, income is disclosed, verified and used to qualify the
applicant.
No asset:Assets are not disclosed, but income is disclosed, verified
and used to qualify the applicant.
No income/no assets: Neither income nor assets are disclosed.
While these categories are fairly well established in the
market, there are numerous differences between individual lenders in the
details. For example, under a stated income program lenders may or may not require that applicants sign a form authorizing the lender to request the applicant's tax returns from the IRS in the event the borrower defaults. Similarly, lenders differ in the amount of assets they require.
Why the proliferation of different documentation programs?
Lenders have realized that many consumers with the potential for home ownership were shut out of the market by excessively rigid documentation requirements. It also dawned on lenders that documentation could be viewed as a risk factor that could be priced or offset by other risk factors.
Full documentation is the least risky to the lender, no
income/no asset is the most risky, and the others are in-between. If the
documentation is riskier, lenders will charge more, require risk offsets, or both. The most important risk offsets are large down payments and high credit scores.
This change in lender attitudes toward documentation is similar to
the change that occurred in connection with credit rating. At one time,
lenders would only deal with what are today classified as "A credit"
borrowers. Now, loans are available for "B", "C" and "D"-credit
borrowers, but they are priced higher and may require offsets by other risk factors.
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Mortgage Terms |
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ARM - stands for Adjustable Rate Mortgage, also referred to as a Variable Rate Mortgage. They both mean the same thing. An ARM is a mortgage with an interest rate that adjusts periodically to reflect changes in market conditions. Your mortgage payments are adjusted up or down (usually on an annual basis) as the interest rate changes. To protect you in a rising interest market, rate increases are limited (usually 2 percentage points annually; 6 percentage points over the life of the loan).
APR - stands for Annual Percentage Rate. This refers to the interest rate that reflects the actual cost of a mortgage as a yearly rate. Because APR includes points and other costs associated with the mortgage, it's usually higher than the advertised simple interest rate. The APR more accurately reflects what you'll be paying and allows you to compare different mortgages based on actual costs. Appraisal - An estimate of the value of a home, made by a professional appraiser. The maximum amount of the mortgage is usually based on the appraisal.
Closing Costs (Settlement Costs) - All the charges associated with getting your mortgage, including the origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, charges for credit reports and other costs. While closing costs depend on your state and county, as a rule of thumb, closing costs usually add up to about 7 percent of the mortgage amount.
Equity - The value of your home after the outstanding balance of any loans are subtracted. If you make a 5 percent down payment, you have 5 percent of the price of your home in equity. As you make payments toward principal over time, the equity in your home grows.
Escrow - A special third-party account set up by the lender in which a portion of your monthly payment funds are held to pay for taxes and insurance and other items. "Escrow" can also refer to a third party who carries out the instructions of both the buyer and seller to handle the paperwork at the settlement.
Fixed Rate Mortgage - A mortgage with an interest rate that stays the same (fixed) over the life of the mortgage. Monthly payments for a fixed rate mortgage are very stable.
Good Faith Estimate - A document provided at application that provides estimates of all costs associated with obtaining and closing a mortgage loan.
Interest - The amount the lender charges to lend you money.
Loan-to-Value Ratio - The relationship between the appraised value of property at closing and the loan amount. Origination Fee - The fee charged by a lender to prepare all the documents associated with your mortgage.
PITI - An abbreviation for the parts of a typical monthly mortgage payment. PITI stands for Principal-Interest-Taxes-Insurance.
Points (Loan Discount Points) - Points are prepaid interest on your mortgage, charged by the lender at the time of closing. Each point is 1% of the loan amount - that is, 2 points on a $I 00,000 mortgage would be $2,000.
Prepaids - The expenses that are put into escrow at closing, usually including real estate taxes, insurance, and interest.
Principal - The amount you borrow, not including interest.
PMI - Stands for Private Mortgage Insurance. PMI is an insurance policy the borrower buys to protect the lender from non-payment of the loan. PMI policies are usually required if you make a down payment that is below 20% of the sales price of the home.
Subprime - Subprime Lending is also called B&C lending. It refers to a category of loan programs that offer more lenient underwriting provisions and expanded credit guidelines. These provisions allow more flexibility in approving loans for borrowers who have less-than-perfect credit. Subprime loans are available at various interest rates and terms. They also offer capabilities for debt consolidation allowing borrowers to get a mortgage with enough extra cash to consolidate loans. Title Insurance - An insurance policy which insures you and/or the lender against errors in the title search.
Title Insurance - An insurance policy which insures you and/or the lender against errors in the title search.
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