Do Lenders Really Need All This Documentation?

I received an email asking a question that a lot of folks are wondering about: “Do I really have to give my lender all this personal documentation?”

Included in the message was the list her loan officer had provided:

* W-2s from the last two years

* Current pay stubs to cover one month pay

* 1040 tax returns, all schedules, all pages, for the last two years

* Two months’ statements, all pages, for all accounts: checking, savings, investment, retirement

* Photo ID

Not only is it a lot of work to photocopy or scan all these pages, but it can seem a little invasive. People wonder why they need to look into every nook and cranny of their financial lives, especially when they have excellent credit and are putting down 20% or more.

Prior to the mortgage meltdown, the only documentation lenders asked for was the W-2 and a pay stub, and confirmation of the down payment. Tax returns were never asked for if you could show your income with a W2 statement. So now, the long list seems over-the-top.

Unfortunately, the answer is that both Fannie Mae and Freddie Mac are requiring triple the documentation that they did before. It’s not your loan officer that is being difficult, it is the new underwriting guidelines. And, it doesn’t stop there!

Just wait until the underwriter reads your credit report. It’s likely you’ll be asked for a Letter of Explanation about all those previous addresses. They want to a signed confirmation that you don’t own other properties they’re not aware of. And if your credit report shows you have a little mom-and-pop side business — such as an online business selling tee-shirts — you’ll have to document and write letters about that, too.

Then when the underwriter reads your bank statements, you might be asked for more letters. They’ll want to know why you have a deposit in the amount of $200 going into your checking account. Where did that $200 come from? Clearly it wasn’t a deposit from your paycheck, which would have been much larger. They want to know if it was a birthday check from grandma or cash from selling marijuana. I know, it’s ludicrous, right?

Welcome to the new rules of underwriting. Everything must be documented, preferably at least three different ways. And since the lender is the one holding the money you wish to borrow, they make the rules.

I spoke to a gentleman who said all the paperwork was “stupid” and that he knew they really didn’t need it. This was based on the last time he got a mortgage, over ten years ago. He decided to take control of the situation, so he told his loan officer, “You don’t need all that and I’m not doing it.” He knew he’d win. After all, he had perfect credit and a good down payment. He knew he was the ideal customer and that there was no way his bank was going to let him go.

Was he in for a surprise! They were more than happy to let him go. Without ALL of the documentation asked for, he was not going to get approved, final answer.

What do you think about all the paperwork and letters that are required to go into a loan file now? Have they gone too far? Or is this what they should have been doing all along? (To comment, see the top of this article.)

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