Documentation In Today's Lending Environment

As the lending environment has changed over the past couple of years, lenders have tightened guidelines and are reviewing files with more scrutiny.  Loose, or a lack of, documentation was more easily overcome in the past.  Recently I’ve had several questions regarding what type of documentation lenders are requiring for specific situations.  The basic overlying principal in all of these is to be able to paper trail the information you want considered as part of your loan application, you won’t be taken at your word.

Here are a few useful examples:

Taxes

Even if you are not required to file taxes in the IRS’s eyes, a lender will require that you have done so or they will want proof you have filed an extension.  The lender will also request a transcript of these tax returns to compare against the information in your loan application.  This helps eliminate fraud from the industry, which at the end of the day helps all of us.

Deferred Student Loans

Many student loan programs allow for periods of deferment, where for one reason or another repayment is not yet required.  Although not required, the estimated payments that will be required on the loan once it is out of deferment will be included in the debt ratio calculation.

Non-traditional Income Sources

Many people receive social security, disability, pension, retirement or child/spousal support income.  The lender will require documentation of the amount of money that is to come to you, the award letter or divorce decree as examples, and documentation that you’ve been receiving it.  The easiest way to document you’ve received it is with 3 months of bank statements showing it has been deposited.  The deposit each month should match the documented amount owed exactly.  If you are given a $300 check for child support, the deposit should be for $300.

Deposits

Documenting funds is the most common loan killer.  Lenders require large deposits to be paper trailed and they require funds to be seasoned for a period of time, usually 2 months minimum, to be considered the borrower’s own funds.  If there is a large deposit on the bank statements, they will want the source of those funds documented.

There are many ways borrowers attempt to skirt the expectation that funds used for qualifying or for the transaction do in fact belong to them and are not borrowed from someone else.  Lenders are smart and will probably see through the attempt.  Here is an example: if someone has $20,000 in their bank account in April yet their previous year’s tax returns have $0 in interest income, the lender will want to know where the money came from because it will look to them like the person applying for the mortgage borrowed this money from somewhere in order to close the loan.

Paper Statements

Many of us today use online banking.  Sometimes we use the transaction detail page of our online banking in place of paper statements.  Lenders don’t like these transactional history print-outs, they like paper statements.  They will however accept a transactional history statement printed and signed by the bank.  I should clarify that I’m not referring to e-statements, which are statements that are emailed instead of snail-mailed.  Printing these on your computer is just fine.

Those are just a few tips to help your next loan transaction go as smooth as possible.

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