Tuesday, March 23, 2010

Paperwork - Should Borrowers Take a Stance?

So how much paperwork do you need to give a lender these days to get a loan? Not that much really, but many people in the market today appear to be uncomfortable with providing much, if any documentation to a lender that is trying to determine if they can safely lend these folks a couple of hundred thousand bucks. In fact, I have encountered an increasing number that simply draw a line in the sand and dictate what paperwork they are willing to part with.

So how did this situation develop and why are these folks playing hardball? And the better question is; should they?

Since the very early days of lending, it has always been understood that in order to qualify for a loan, you had to provide some information about your personal finances.

Near as I can tell, the need for full documentation started to change a little over ten years ago when “stated income” loans began to become more commonplace. The large depository banks, along with investors and lenders at all levels, felt protected by ever appreciating property values and they became emboldened to create loan products with riskier guidelines. Thus the “stated income” programs were born. Originally they were put in place only for the self employed and then they were quickly extended to W2 wage earners.

This made the whole loan process, from application to funding, very simple and largely trouble free. After all, you no longer had to prove your income; so you were no longer asked to provide pay-stubs, tax returns or rental agreements. In many cases the buyer didn’t have to provide bank statements either. They could go to see their loan officer, have a credit report pulled, sign an application and then not even have to talk to the loan officer until they went to sign their documents at the close.

This was great! Unfortunately, it also gave rise to a whole group of borrowers whose only experience has been in a stated income environment.

Now, these same buyers come back into the market to purchase or refinance and they discover that things are very different and they are being asked to provide income and asset documentation. They are often shocked and some end up taking a stance with their lender and in effect, drawing a line in the sand defining for everyone what information they will and will not provide.

Things are very different in the lending market of today versus that of even a few years ago. Stated income is gone! Fully documented lending is the only way loans are getting done.

So here is the point of all this. - In order to lend any money in today’s market, just as it was done in the past, a lender has to be able to look at your income and asset documentation. So there is no sense in drawing a line and attempting to decide for the lender, what they can and cannot see. For those that do this the result is easy to predict, the loan gets denied.

Find a loan officer you trust and be prepared to work with them, not against them. The loan officer is not going to ask you for any more paperwork than is absolutely necessary. A competent loan officer knows what is required and will easily explain it all to you. In today’s market you need to team-up with your lender and participate in the process.

The loan officer is your advocate, not our adversary.

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