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Unnecessary Documentation

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Posted On: 12/03/2008

Q:I'm a long-time loan officer and disagree with your view that all borrowers should use fully documented mortgage applications. For instance, I have a borrower right now who is purchasing a $450,000 property with a loan of only $150,000. With that down payment, a credit score of 810 and a very long history of stable employment why do I need to document her income to the hilt?

A: You raise a fair point, the borrower surely seems well qualified and the down payment is so substantial that it's difficult to see any risk to the lender. That said, the need for fully documented loan applications has little to do with your borrower.

Underwriting standards have been so lax during the past few years that lenders have a vast confidence and credibility gap. If we are to get investors worldwide to buy mortgage-backed securities, those investors must feel certain that the loans are good. The only way to do that is to make sure each and every loan is fully documented.

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The idea is not that every loan decision will be perfect or that foreclosures will never happen, rather it is to assure investors that every effort has been made to protect their interests - otherwise they may take their money elsewhere, something that would quickly raise mortgage interest rates.

No less important, no one wants foreclosures. Lenders and securities investors certainly don't want houses, they want principal and interest. Borrowers absolutely don't want foreclosures; no sane person wants to lose their home. With full docs, borrowers have higher hurdles to cross, hurdles that will moderate the desire to buy too much house - and in some cases to claim income and assets that are simply not there.

Lastly, there's another reason to get rid of stated-income loan applications: Excess price appreciation. If someone can get a huge loan that is unjustified by their income, they can bid more for properties. Other buyers must now raise their bids to compete. The result is that home values are artificially inflated because big loans are available, mortgages that would not be possible if borrowers were required to fully document their income and employment.

The betting here is that your supremely-qualified borrower is also well-organized and can dip into a file and instantly provide the paperwork you need. With full docs your borrower will be able to get financing at a reduced rate, a nice bonus with a real cash value for a little more effort up front.

Q: We're thinking about buying a house online. It seems quick and simple and there's no cost for a broker. How should we go about such a purchase?

A: I'm one of those people who like the Internet for all sorts of reasons, but buying a home online without physically seeing both the property and the neighborhood strikes me as incredibly unwise.

The issue is not technology - there's great technology online with house photos, videos and information. But a house is not a standardized widget; all homes are different. Photos don't tell you about that strange smell in the basement, the floor that dips or maybe about the all-night gas station next door.

Is it OK to visit newspaper and broker Web sites to see homes? Sure. But that's a starting point in the home-searching process, not an end.

Given the complex and localized nature of real-estate agreements purchasers are best served using an experienced buyer broker - someone to represent their interests - who knows local property values and options and who has done real-estate deals before. Otherwise you're on your own - and that can be a disaster if you don't know about contracts terms, neighborhood trends or pricing.

Q: I'm a renter. Can I be required to pay an inspection fee when the landlord picks the inspector and is really the beneficiary of the inspection?

A: Read your lease. If it gives the property owner the right to inspect the property and requires that you pay the bill, then you'll need to write a check. There might be grounds for objection if the bill is not reasonable for the services performed, but this is an argument you're unlikely to win.

Q: Given our slowing local market is, this a good time to buy a new home from a builder?

A: If you need a new home, if it's affordable, if you expect to be a long-term owner, and if sensible financing is available, then consider it. In other words, market conditions are just one part of the equation; you also have to look at your personal preferences.

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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