Does It Have To Be Painful?

The answer is both yes and no, depending. On what? Well, a number of things.

It is easier to start by stepping back and considering what is important from the lender’s point of view? They are concerned about three things:

Your ability to pay back the loan, which is determined by income.

Your willingness to pay back the loan, as measured by your credit score.

The quality of the collateral securing the loan, as established by the appraisal.

That’s really all there is to it. Once we appreciate that perspective we understand why they require the paperwork they will ask for.

Some people may be asking, haven’t things changed since the meltdown in order to tighten things up? Aren’t there all sorts of unreasonable additional paperwork that is required now? The answer is that now those three concerns of the lender will have to be verified with full documentation.

To illustrate, there is one type of loan that has completely disappeared. The stated income loan. These were originally designed to allow credit-worthy self-employed borrowers to qualify for loans despite the fact that their tax returns had been designed to minimize their taxable income. These borrowers did not have to prove their income but had to have high credit scores of above 740 and lots of money in the bank. How much money? They had to prove they had reserves in the minimum of six times the monthly income they stated they were making. They were also restricted to a lower percentage of the home’s value. This loan limit, expressed as a loan to value ratio, was usually set at a maximum 80 percent of the appraisal evaluation.

The problems arose when lenders began to loosen these safeguards. Minimum credit scores gradually dropped to around 600. Cash reserve requirements shrank to only twice the monthly stated income and loan to values shot all the way to 100 percent financing in some cases. All a borrower had to prove with just a CPA letter was that they had been self-employed for two years. There were also many loans done without an appraisal. No more!

Now, all income, assets and home values must be verified. Generally speaking, since there are so many variations and exceptions in loan products, the requirements are as follows: For income you need to prove two years of employment. For a wage earner, that requires either W2s or 1099s and a year-to-date paystub. For those who are self-employed, two years of tax returns are required. Because of past fraud in the form of dummy documents or fake tax returns, no loan is now funded without a transcript of the tax return from the IRS matching the submitted documents.

The other major adjustment has to do with the documentation of assets. This is especially important in “sourcing” the down payment on a purchase. Depending on the loan program’s guidelines, there is a certain percentage of money that needs to show up at the closing table.

It is important to prove that this money (the down payment) did not come from an interested party. Which can be understood, as this applies to anyone who is making money from the transaction – i.e. the seller, realtor or lender, who might supply money so that they can make a commission or sell the home. If the down payment is an allowable gift or money from the buyer’s assets it needs to be traced back to its source. If the source is the buyer then they must supply two months bank or investment statements showing it as their funds. A gift will also be traced back to the gifter’s account showing it being withdrawn.

The new wrinkle here is that in the wake of 9/11, there is an increased scrutiny and alertness for laundered money. Yes, I guess terrorists buy houses sometimes. So any large deposits in any of these accounts that are not payroll or transfers have to be sourced as well, with the proof of what they are. Usually deposit slips and cancelled checks are required.

People who have stashes of cash and want to deposit it to use as a down payment are out of luck. Likewise if you get a check from someone who is paying back a personal loan, you will have to verify the transaction with a signed note. If you sell something to raise cash you will need a bill of sale. There are no exceptions on this.

Neil Funsch has been a mortgage broker for 18 years, the last four in Park Hill. He can be reached at 303-229-2684 or neil.funsch@gmail.com.