A documentation loan is any loan that requires full information substantiating a borrower's claims of income and assets in order to gain financing. The vast majority of loans are documentation loans. Lenders use the documents provided during the underwriting process to assure the application for financing is accurate and to further determine the terms of a loan contract. "No doc" loans, in contrast, require no verification. No doc loans are also known as "high risk" loans, and they may even violate standard lending principles. Therefore, it is best to attain a documentation loan when possible by providing necessary loan information.
The first thing you will need to supply a lender in order to prove you can afford a loan is verification of your income. There are several ways to verify income, and each lender may have specific requirements. One option that works for most lenders is supplying at least two years of tax information. For example, submit copies of the past two years' worth of W-2 statements, which record your official income. If you are self-employed, you will need to supply Schedule C statements instead.
Lenders may also accept paycheck stubs or verification of income from your employer. However, many lenders would like to see that you have been earning an income equal to your current level for at least two years. The best scenario is to show continued employment for two years with the same employer with an increasing income.
Lenders will consider your assets when reviewing your full financial strength. Not all lenders need to know your "net worth" in order to extend your loan. However, if you are placing any collateral down on a loan, you will need to verify the value of that collateral through full documentation. For example, if you are taking out a home equity loan, the lender may require an up-to-date home appraisal and a statement from your primary lender. The primary lender's statement will reflect how much equity you have earned in the home through paying down your mortgage. This tells the second lender just how much it can expect to recover if you were ever to default on the loan and the lender needed to seize your asset.
Liens and Liabilities
Lenders cannot count your assets alone in order to determine your financial stability. Your debts, liens and liabilities will also be taken into account. For example, when you apply for a mortgage, your mortgage lender will need to know if you also owe money to a student loan lender and a car loan lender. This can affect your ability to afford a new loan based on your current income. Liabilities can be found through a simple credit check. Your credit report will reflect all of your debts and liens against your property. A credit check is completed without any documentation from you. All you will need to supply is your Social Security, Tax Payer Identification or Credit Report number. The lender will carry out the credit check with your approval.
Low or No Documentation Loan
A low or no documentation loan requires very little verification of the claims made on an application. Documentation loans require a borrower to submit proof of income, proof of assets and other documents prior to having a loan move through the underwriting process. A no or low documentation loan requires none of these items. Instead, the borrower must place only enough money as a down payment (30% min) in order to receive the loan. In exchange for the relative ease of the lending process, the borrower may have to accept higher interest rates and financing charges as well as a lower loan-to-value ratio on an asset.
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