Thursday, April 14, 2005
Mortgage documentation and the differences between stated income, full doc, and no doc home loans.
You may have heard of a few of these terms in your search for a home loan. Perhaps you didn't know the options were even available. Few mortgage professionals really take the time to explain the difference between the documentation options on loans and what it means to the average borrower. Let's start with a brief description of the various terms. There are basically 4 different types of documentation levels for mortgages; Full Doc, Stated Income, No Ratio, and No Doc. I've listed them here from the lowest rates and most programs available to the highest rates and fewest programs available.
Full Doc
Fully documented loans are pretty self-explanatory. The borrower supplies all documentation for their assets and income. The income documentation generally consists of W-2s and paystubs for employees and tax returns and year-to-date profit and loss statements for self-employed borrowers. The asset documentation basically involves current statements from any monetary assets (Stocks, bonds, checking, savings, 401k, IRA, etc.). This is the highest level of documentation for mortgages and allows borrowers to receive the best possible rates and programs. It is also the most common financing option, though the margin is narrowing. We'll cover the next most prevalent level of documentation next.
Stated Income
Stated income loans are very aptly named. You basically "state" how much money you make each month and the lender doesn't do any type of verification of this figure. There are three common misconceptions with stated loans.
The first is that you are able to obtain a stated income loan without a job or with less than two years of experience in the same industry*. This is not true. Even though the lender does not verify the actual amount of income you make, they will verify that you are gainfully employed and your length of employment.
The second mistake people make is that they believe that stated income are only available to self-employed borrowers. While this was the case a few years ago (with a few exceptions), stated income loans are now available to borrowers with any type of employment status.
The third common misconception is that you are able to state any amount of income for your job. The amount of income you state must be reasonable in an underwriter's (an underwriter is the person who approves or denies a mortgage) eyes for the position you hold. While this is a very subjective thing, common sense will usually tell you if the amount is unreasonable. For example, everyone is pretty well aware of how much a public school teacher makes (not enough), so stating that you make $15,000 a month teaching fourth grade is probably not going to past an underwriter's desk for approval. Now if your position is sales or commission based, "reasonable" becomes a very tough thing to determine. Some salespeople command very high salaries or commission splits, so it's difficult for someone underwriting the loan to determine how much a person makes.
One last point on stated income loans. There are actually two different types. One is referred to as a Stated Income/Verified Asset (SIVA) loan and the other is a Stated Income/Stated Asset (SISA) loan. Just as they sound, on a SIVA loan, the underwriter will want verified assets and on the SISA loan, the assets will be "stated," just like the income. Now on to the third type of Documentation.
No Ratio
No ratio loans are the same as stated loans, except the borrower does not put any income information on the application at all. Therefore, the lender does not calculate how much debt the borrower can handle. Referred to as a debt ratio, this varies from loan program to loan program. The borrower's employment status is still verified, but no income information is asked for or given between the underwriter or the borrower. This alleviates the problem of people having to claim more than reasonable income for their position. Assets are generally verified with no ratio loan programs. The underwriter has to have something to approve the loan on, right? Wrong, which brings us to our final type of loan.
No Doc
This is the lowest level of loan documentation possible. With this type of loan, the borrower is not asked to provide any income, employment or asset information. This loan is essentially approved with only an appraisal and the borrower's credit (and of course a clean title report). No job or assets are required.
I know what you are thinking, why doesn't everyone do the no doc loan? It seems like a very simple transaction, and it truly is, but it is very limiting as far as loan programs and the rates are not nearly as competitive as the other types of financing. No doc loans are usually best for borrowers with a whole lot of equity in their house (35% or more) or borrowers without any other choice (between jobs, newly self-employed, etc.).
I am always available should you have any questions on documentation or any other aspect of mortgages. You can find my contact information here
*There are some exceptions to the two year employment rule, such as full time students taking jobs immediately out of school.
Full Doc
Fully documented loans are pretty self-explanatory. The borrower supplies all documentation for their assets and income. The income documentation generally consists of W-2s and paystubs for employees and tax returns and year-to-date profit and loss statements for self-employed borrowers. The asset documentation basically involves current statements from any monetary assets (Stocks, bonds, checking, savings, 401k, IRA, etc.). This is the highest level of documentation for mortgages and allows borrowers to receive the best possible rates and programs. It is also the most common financing option, though the margin is narrowing. We'll cover the next most prevalent level of documentation next.
Stated Income
Stated income loans are very aptly named. You basically "state" how much money you make each month and the lender doesn't do any type of verification of this figure. There are three common misconceptions with stated loans.
The first is that you are able to obtain a stated income loan without a job or with less than two years of experience in the same industry*. This is not true. Even though the lender does not verify the actual amount of income you make, they will verify that you are gainfully employed and your length of employment.
The second mistake people make is that they believe that stated income are only available to self-employed borrowers. While this was the case a few years ago (with a few exceptions), stated income loans are now available to borrowers with any type of employment status.
The third common misconception is that you are able to state any amount of income for your job. The amount of income you state must be reasonable in an underwriter's (an underwriter is the person who approves or denies a mortgage) eyes for the position you hold. While this is a very subjective thing, common sense will usually tell you if the amount is unreasonable. For example, everyone is pretty well aware of how much a public school teacher makes (not enough), so stating that you make $15,000 a month teaching fourth grade is probably not going to past an underwriter's desk for approval. Now if your position is sales or commission based, "reasonable" becomes a very tough thing to determine. Some salespeople command very high salaries or commission splits, so it's difficult for someone underwriting the loan to determine how much a person makes.
One last point on stated income loans. There are actually two different types. One is referred to as a Stated Income/Verified Asset (SIVA) loan and the other is a Stated Income/Stated Asset (SISA) loan. Just as they sound, on a SIVA loan, the underwriter will want verified assets and on the SISA loan, the assets will be "stated," just like the income. Now on to the third type of Documentation.
No Ratio
No ratio loans are the same as stated loans, except the borrower does not put any income information on the application at all. Therefore, the lender does not calculate how much debt the borrower can handle. Referred to as a debt ratio, this varies from loan program to loan program. The borrower's employment status is still verified, but no income information is asked for or given between the underwriter or the borrower. This alleviates the problem of people having to claim more than reasonable income for their position. Assets are generally verified with no ratio loan programs. The underwriter has to have something to approve the loan on, right? Wrong, which brings us to our final type of loan.
No Doc
This is the lowest level of loan documentation possible. With this type of loan, the borrower is not asked to provide any income, employment or asset information. This loan is essentially approved with only an appraisal and the borrower's credit (and of course a clean title report). No job or assets are required.
I know what you are thinking, why doesn't everyone do the no doc loan? It seems like a very simple transaction, and it truly is, but it is very limiting as far as loan programs and the rates are not nearly as competitive as the other types of financing. No doc loans are usually best for borrowers with a whole lot of equity in their house (35% or more) or borrowers without any other choice (between jobs, newly self-employed, etc.).
I am always available should you have any questions on documentation or any other aspect of mortgages. You can find my contact information here
*There are some exceptions to the two year employment rule, such as full time students taking jobs immediately out of school.
