Since the mortgage crisis, the lending industry adopted new practices. One new practice worth highlighting is the switch from stated-documentation and full-documentation to primarily full-documentation only. Lenders made the switch because full-documentation borrowers carry significantly less risk than stated-documentation ones.
The Distinction
Stated-documentation loans were an attempt to simplify the documentation process. Instead of verifying bank statements, a borrower simply said, “I make $120,000 annually, I have $80,000 in my savings account, I carry $10,000 in credit card debt.” The lender accepted these statement as fact. Today most loans require full-documentation, meaning a borrower must provide actual documentation.
Is not stated-documentation an oxymoron?
Impact? Less borrowers qualify
Less buyers qualify for two reasons. First, the stated reality versus actual reality are sometimes very different. Now borrowers that qualified by lying are ferreted out. Second, variable-income earners, such as myself, salespeople and consultants, have much difficulty documenting steady past and future income. Consequently variable-income earners who are new (without three or more years of steady income) or had bad years (low income) no longer qualify.
Final Thoughts
Variable-rate earners make up a large portion of the Peninsula buyer pool and therefore, the loss of their presence definitely impacts demand for local homes. On the flipside, lending to risky borrowers fueled the mortgage meltdown. Moves to safer practices, such as requiring full-documentation, are welcomed with open arms.
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