You’ve just spent a couple hours getting together everything your mortgage lender has asked for: pay stubs, W-2’s, tax returns, bank statements, ID, etc. You haven’t pulled this much paperwork together since you last did your taxes! You breathe a sigh of relief as you send everything over, then you get on with your busy day. Not long after, you receive an email from your loan officer asking for more information. What gives?
Documenting Mortgage Loans Like It’s 1999
We live in an instant gratification society. Walk into a dealership, answer a few basic questions, and with the click of a button you can get instantly approved to buy a car. Fill out a brief online application and you get instant approval for a short-term personal loan to finance home improvements through your preferred contractor. With a few clicks or taps on a website or phone app, you can have food delivered in short order (pun intended). But mortgages? Well, that’s a whole other ball game…
In a world where we can have virtually anything we want delivered within hours or days, it can be encumber some to wade through the antiquated mortgage process. Mortgage lenders require a lot of paperwork and going through the process may feel anything but modern.
Admittedly, there are some lenders who have made larger strides than others in terms of technology. Even in those cases, the mortgage process may have been improved in some respects, but it’s still a far cry from a seamless and pain-free process. Don’t be fooled by fancy advertisers who claim you can get a mortgage in 15 minutes or close within a matter of days. The process is the same no matter which lender you choose and it’s not going to be an easy one. Prepare to walk a mile in your dad’s shoes.
Loan Documentation Reduces Risk
Why do lenders ask for so much paperwork? Consider this broader perspective.
Most (but not all) mortgages are backed by governmental or quasi-governmental agencies. These include conventional, FHA, USDA, and VA loans and all lenders who offer these loans essentially work off the same lending guidelines. Although, some may have their own overlay on top of standard agency guidelines. The general process for you, the borrower, is the same across the board. You will complete a loan application. Your loan will be processed and underwritten, then you will attend a loan closing. The documentation you are asked for will be required (barring any lender overlay) by the agency insuring or guaranteeing your mortgage.
Closed loans must meet agency guidelines, otherwise they will not be insured or guaranteed. When your lender asks you for loan documentation, they are taking steps to ensure your loan is properly documented so it will be insured or guaranteed. That insurance or guarantee doesn’t protect you; it protects the lender servicing the loan in the event you default on your mortgage. Lenders want to know they will be made whole by the insurance or guarantees agencies provide if you stop making your mortgage payments.
When a loan is not properly documented, a lender may be asked to buy it back. No lender wants to buy back loans. If/when they do, they either keep those loans on their books and service them in-house or sell them in the secondary market as “scratch and dent” loans, taking a loss on the sale. Larger lenders may be able to absorb the losses of a few buybacks. But a handful of buybacks could put a smaller lender out of business. If a lender is diligent about documenting loans, they protect their bottom line. If a lender is sloppy about documenting loans, they run the risk of putting themselves out of business.
Healthy Lending Practices
What drives this demand for loan documentation in the first place?
Fraud plays a large role. The mortgage fraud that has been committed throughout the years and the economic havoc it has wreaked is one reason why the agencies demand heavy loan documentation from lenders and borrowers. Prevention of faulty lending practices plays another role. Properly documenting loans provides extra layers of risk mitigation to avoid fraud and reduce mortgage delinquencies. The agencies want lenders to avoid making fraudulent or bad loans and lenders want the agencies to insure or guarantee the loans they make as a preventative measure against future losses.
Though it may seem like a trying exercise in the heat of the moment, your willingness to provide documentation to support the information on your loan application and your lender’s diligence in obtaining it is a collaborative effort to prevent fraud and support healthy lending practices.
Need financing?
Call 1-844-RENO-GAL or visit www.TheRenoGal.com.
Jennifer Goldsby, NMLS #591226
VP, Renovation Lending
Diamond Residential Mortgage Corporation NMLS #186805
Equal Housing Opportunity
Disclaimer: The postings here reflect my personal opinion. They do not necessarily represent the opinions of Diamond Residential Mortgage Corporation and its management.
