Tutorial on Selecting Documentation

18 April 2006, Revised November 18, 2008, Reviewed July 27, 2009

A lender’s "documentation requirements" stipulate a) the information about income, assets and employment that must be provided; b) whether and how this information will be used by the lender; and c) whether and how the information provided will be verified by the lender.

In normal markets, lenders usually offer multiple choices, from the most demanding called “full documentation”, to the least demanding called “no-docs”. The full range is shown in the table below. Because the risk to the lender rises as documentation requirements become less stringent, the price of the mortgage rises correspondingly.

 Type of Documentation  Type of Borrower
Full Borrower can document income for last 2 years as derived from one job or business, and such income is sufficient to qualify.

Alternative Same but the borrower is in a hurry. Ask for this, it does not cost anymore.

 Stated Income  Borrower has sufficient income to qualify but cannot fully document it because, e.g., it is business income, borrower changed job or was promoted, there are two incomes but only one is being used to qualify, etc.

 No Ratio  Borrower’s income does not meet lender standards but borrower considers it adequate because he is accustomed to allocating a large percent of income to housing, has dependable family support, will shortly reduce expenses by paying down other debt, etc.
 Stated Income/Stated Assets  Borrower cannot fully document assets (as well as income), but expects to have enough from gifts, business income, cash-out refi, etc
 No Income/No Assets (NINA)  Borrower with a job or business either does not have the income and assets to qualify, or does not wish to disclose them. Borrower might have substantial income-generating capacity, such as a physician moving to a new state, or substantial home equity.

 No Docs  Same as NINA but borrower cannot document a job or business.

In general, borrowers receive better pricing the more documentation they provide, though providing documentation can be a hassle. Some borrowers have such a strong aversion to the hassle that they are willing to pay the price to avoid it. That’s OK so long as the decision is yours and not the loan provider’s. Occasionally they steer a borrower into less demanding documentation in order to make less work for themselves. That you don’t permit.

As the financial crisis evolved in late 2007 and early 2008, the range of available documentation requirements gradually shrank. No docs were gone by December 2007, and by June, 2008, virtually all loans being offered were full doc. The more liberal requirements will be back, but nobody knows when.

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