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No Dice on No-Doc Loan

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Posted On: 02/16/2011

QUESTION:

We’re self-employed and have financed real estate in the past with no-doc mortgage applications. Our tax returns are complex and we like our privacy so we prefer to go the no-doc route. Now we can’t find a lender who will accept a no-doc application. How come?

ANSWER:

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The Wall Street Reform Act passed this summer provided a number of circumstances under which a lender can be sued by a borrower for failing to properly originate a mortgage. Lenders, however, can have almost total protection (a “safe harbor”) if they make VA, FHA and conventional mortgages with points and fees that equal not more than 3 percent of the loan amount AND the loan is underwritten with a fully-documented mortgage application.

By definition, a “no doc” or “low doc” loan application does not meet the standard of a fully-documented mortgage file. Wall Street Reform requires that lenders verify (document) employment and income at the time of application, among other standards.

This is nothing new or different than in the past for most borrowers. New VA and FHA loans have always required full documentation. Most conventional loans are underwritten with full documentation. Most community banks, local S&Ls and credit unions have always required full documentation.

The problem is that with the “nontraditional” mortgage products seen between 2002 and 2007 lenders often welcomed no-doc loans. Borrowers could essentially estimate (guess) their income. Combine toxic loans with woeful underwriting and you get a big portion of today’s mortgage mess.

But no more. Forget about notions of privacy, now you have to show your income and employment. That tax return may be “complicated” but since lenders work with tax returns every day it’s no big deal.

There may be rare cases where you can get a no-doc loan with a huge down payment and financing from a “portfolio” lender, but otherwise gather up your tax returns when next you meet with a mortgage lender.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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