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.
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.
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.
Most lenders have a requirement that the cash reserves/assets have at least two months seasoning, or two months in the same account.
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.
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.
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.
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.
requires that the income be stated on the loan application, but the assets are verified just the same as full doc, and two years of employment in the same field is verified with a VOE, but again, the employer is not required to note income on the VOE.
A common error is calculating cash reserves based on the current loan’s PITI; this is a mistake, when calculating cash reserve requirements for the purpose of qualifying for a new loan, the PITI under the new loan is what’s important. So, if the borrower wants to pay principal and interest on the new loan, and PITI under the new loan will be $3,500, in order to meet the standard 6 months cash reserves requirement, the borrower will need to have $21,000 in seasoned cash reserves. Here’s the breakdown of that calculation:
New Principal and Interest Payment = $2,900/month
Property Taxes = $400/month
Homeowner’s Insurance = $200/month
PITI = ($2,900 + $400 + $200) = $3,500/month
6 Months Cash Reserves = (# of Months) * (Monthly PITI) = (6 months ) * ($3,500/month) = $21,000
Other Mortgage Doc Types
There are several other, less common, doc types that we’ll cover in the next article. These include the No Income/No Asset (NINA), No Doc, and No Ratio doc types, so stay tuned.