Mortgage Doc types

If you have a mortgage or have ever tried to qualify for one, you’re probably familiar with the term “Full Doc,” short for Full Documentation. That term refers to the level of income and asset documentation provided to the lender for a loan qualification. In the industry we call these Doc Types(the “Doc” stands for documentation), and there are quite a few of them, but the most popular and widely used are Full Doc and Stated. In this article you’ll learn the difference between Full Doc and Stated Loans as well as the other loan doc types.

When I price out a loan scenario with my lenders, they always ask, “What’s the doc type?” The answer to that question will be a factor in determining the borrower’s interest rate on a particular loan. The doc type refers to the method by which we verify, or document, the borrower’s income and assets for the purpose of a loan qualification/approval. The different doc types vary in their levels of risk to the lender and, as such, usually lead to different interest rates for any given loan program.

Important Terms

You didn’t think vocabulary class was over after grade school, did you? These are some terms we’re going to have to understand in order to follow along.

VERIFICATION OF EMPLOYMENT (VOE) –

This is a document sent (usually faxed) to a borrower’s current employer, which he or she will fill out and return to the lender for the purpose of confirming that the borrower has been employed there for at least two years. It may not be necessary for the employer to confirm length of employment under certain doc types.

CASH RESERVES(ASSETS) –

Also known as liquid reserves, this refers to the amount of the borrower’s assets that are considered liquid by the lender. This includes, but is not limited to: checking, savings, stocks, 401(k), IRA, or money market account. Generally, cash reserves will include anything you are able to access within a week or so if need be, even if there is a penalty for early withdrawal, such as with a 401(k).

For the purpose of qualifying for a loan, cash reserves are considered in months and are calculated based on the combined payments of loan principal, interest, property taxes, and homeowner’s insurance for the new loan.So, if a borrower has $20,000 in a 401(k), and, under the new loan, principal, interest, taxes and insurance payments total $3,500 per month, take $20,000 divided by $3,500 and you find that borrower has 5.7 months of cash reserves.

SEASONED ASSETS –

Most lenders have a requirement that the cash reserves/assets have at least two months seasoning, or two months in the same account.

PITI –

Acronym for Principal, Interest, Taxes, and Insurance. This is the combined monthly payment that a lender will consider housing expenses. Incidentally, for the purpose of loan qualification, PITI under the new loan is what’s important, not the current loan. Also, if the new loan will be interest-only, PITI is replaced with ITI (Interest, Taxes, and Insurance) for most qualification requirements.

Full Doc

A full doc loan, also known as going full doc, or full documentation, is a loan that requires two years worth of income verification as well as seasoned assets. We’ll get into seasoned assets in a bit, for now lets focus on income documentation. Thinking of it as a full doc loan is slightly misleading; it’s better to think of the doc types in terms of pricing, as I can usually do any given loan program on a variety of doc types. So, instead of a full doc loan, think of it as full doc pricing.

Most lenders require two years worth of income documentation in the same field, preferably at the same job. This is usually in the form of the past two years’ tax returns (W2s), the past two months’ pay stubs, and a VOE (see terms above). If a borrower has not been employed with the current company for at least two years, but can document two years of employment in the current field, the lender will usually accept that. So, if a borrower has been an administrative assistant at his or her current company for only a year, but was also an administrative assistant at another company prior to the current one, that borrower should be fine.

As far as assets go, the lender will usually want to see the most recent two periods’ bank statements confirming 6 months worth of cash reserves. I mentioned the term seasoned assets above, which means the assets must have been sitting in the same account for at least two months; this is why you shouldn’t transfer money around when you’re about to refinance or purchase a home.

Stated Doc

This is usually referred to as going stated, or simply, stated. There are several types of stated loans, but the most common two are Stated Income/Stated Assets (SISA), and Stated Income/Verified Assets (SIVA). If you’ve ever heard the term “Liar Loans,” stated loans are what that term refers to due to the fact that stated income means just that, stated, and people get away with stating just about any income they want that will allow the borrower to qualify for the loan, as long as it’s within reason (i.e. Stating a $10,000 per month income for a waiter just won’t fly). It is illegal to overstate income, but these types of loans have been so popular in the past because it’s nearly impossible to enforce that.

SISA

requires that the income and assets be stated on the loan application, but they are not verified in any way. Two years of employment in the same field, however, is verified with a VOE, the only difference is the employer is not required to note income on the VOE.

SIVA

requires that the income be stated on the loan application, but the assets are verified just the same as full doc, and …

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What is YSP

Recent News On HR3915 To Outlaw YSP, Among Other Things

If you follow the mortgage or real estate markets at all you’ve probably heard about HR3915, the new proposition to, among other things, outlaw Yield Spread Premium (YSP) in mortgage transactions. If you haven’t heard about it, just do a Google search on HR3915 and you’ll find quite a bit about it. If you want to read the actual resolution itself, you can find it here…HR3915. So let’s break down yield spread premium and whether it’s a good or bad thing.

Yield Spread Premium, What Is It?

YSP, or Yield Spread Premium, is a term familiar to mortgage brokers and those home-owner’s who’ve done business with a mortgage broker. Essentially, YSP is a premium paid by the bank as a result of the broker/borrower accepting a higher interest rate than “par.” If you don’t know what I mean by “Par,” you can read a bit about the interaction between points and rate in this post, but I’ll give you a brief refresher here.

Interest Rate – Loan Cost Interaction Refresher

When I shop for a loan for a client, the bank gives me options as to how I want the loan priced. Aside from all the traditional factors affecting interest rates and loan costs, the bank gives me, and hence my client, two numbers that we can play with to change the interest rate and closing costs of the loan. Those two numbers are points and interest rate, and they vary inversely, in other words, when one goes up, the other comes down.

If I have a client who wants the absolute lowest interest rate offered by a given bank, also called the “floor,” the bank will accept money up front to essentially allow the borrower to buy the rate down; the money the bank accepts is referred to as points because the cost to buy down the interest rate is represented by a percentage of the total loan amount.

So, that’s what’s known as paying points, the opposite is known as a rebate; also called Yield Spread Premium, or YSP. Let’s say my client doesn’t want to pay any closing costs at all; without YSP, that’s impossible. There are costs associated with a mortgage transaction that no amount of wishing and hoping will make disappear; there are several people that work on any given mortgage transaction, and all those people get paid through the profits on the loan. However, YSP allows me to set up a situation for my client in which he or she won’t have to pay any closing costs, or so it appears, let me explain.

Generally, on any given mortgage transaction, a homeowner can expect to pay $3500 or so in total closing costs; the money will be paid, and it willcome out of the homeowner’s pocket, there’s just no way around it. There are certain situations, however, in which a homeowner would benefit from not paying any up front costs for a mortgage. Yield Spread Premium allows us to accomplish that; in exchange for a slightly higher interest rate, the bank will pay a rebate on the mortgage transaction; the amount of the rebate depends on the amount of the rate increase. If my client wants no out-of-pocket closing costs, we increase the rate slightly, receive a rebate, and the rebate pays for the borrower’s closing costs as well as compensation to those who worked on the loan.

I mentioned “par” earlier; the par rate is the rate at which the borrower qualifies without paying any points and without receiving any rebate. If we want to pay points, we can get a rate below the par rate, and if we want to receive a rebate, or YSP, we get a rate above par. It’s important to keep in mind that the par rate is not going to give the borrower a no-closing costs loan, the borrower still has third party fees and broker fees to pay.

How Yield Spread Premium Affects Homeowners

Now that we’ve had our interest rate/loan cost interaction refresher, we can understand how YSP affects you, the homeowner. Let’s start with the good side of YSP – when it’s used responsibly by the broker.

When YSP Is Used Responsibly

Let’s say I have a client named Joe who plans to move in a year, but his mortgage rate is about to adjust and he doesn’t want to get smacked with ever-increasing payments. I’d usually recommend to Joe that he not pay any points, and, in fact, no out of pocket costs at all, and, instead, accept a slightly higher interest rate, and here’s why.

Let’s say Joe’s third party closing costs (Title, Escrow, Recording, etc fees) are $3,500. Let’s also assume that Joe has great credit and qualifies for a 6% interest rate at par (no points, no rebate). To close that mortgage transaction, Joe is going to have to pony up the $3,500 either out of pocket, or it will be rolled into the loan amount, in addition to my compensation. Now, let’s also assume that if Joe was willing to accept a 6.5% interest rate, the bank would pay a rebate of 0.875% of the loan amount(this rebate is YSP). If Joe’s loan amount is $600,000, that 0.875% rebate would amount to $5,250, which, in Joe’s case, may be enough to cover all of his $3,500 in third-party fees as well as my fee. So, Joe gets a no closing cost loan, but was it worth it to take a higher interest rate? Since Joe plans to move in a year, it probably was; let’s take a look.

Was Joe Better Off With No Closing Costs And A Higher Interest Rate?

That extra 0.5% on the rate will end up costing Joe $250 a month, which, over the course of the next year will add up to $3,000. But remember, the bank paid us a rebate of $5,250 (again, this …

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