Search by borrower can still turn up a 'low doc' mortgage


January 13, 1991|By ELLEN JAMES MARTIN

If you're one of the thousands of self-employed Americans counting on a low-documentation mortgage to ease you through the mortgage processing pipeline, take note. The so-called "low doc" loan is an endangered species.

"You're going to have to thumb through the Yellow Pages until you hit the magic lender that still offers a low doc loan," cautions Peter G. Miller, author of "The Common-Sense Mortgage," a book on mortgage financing.

The softening economy and problems with low doc loans made in the past are among the reasons many lenders are backing away from this type of home loan, designed to make it quick and easy to obtain a mortgage if you have at least a 20 percent to 30 percent down payment on the property you're financing.

"When the economy started heading south, some of these loans starting turning risky," says Keith Gumbinger of HSH Associates, a mortgage publishing firm based in Butler, N.J.

If you're in business for yourself and have ever applied for a mortgage loan, you'll know why the low doc loan -- introduced in the late 1980s -- became such a hit with the self-employed.

That's because the standard mortgage documentation process imposes such extensive paperwork demands on the self-employed and those who work on a contractual basis or for commissions.

"It's a real hassle for the self-employed to get a mortgage," Mr. Miller points out.

Suppose you're a young attorney in practice for yourself. You happen upon a little stone cottage on a hillside and decide to take out a standard mortgage to buy the place.

To your horror, you'll soon realize that proving your capability for the mortgage is no mere credit application but the equivalent of a formal financial audit.

"It's almost like being guilty and trying to prove yourself innocent," Mr. Gumbinger says of the usual documentation required of a self-employed person.

Paperwork demands vary from lender to lender when it comes to mortgage documentation. But while an attorney on salary with a large corporation can usually prove his income primarily with W-2s, his counterpart in private practice, who has no such documents at hand, may have to go to amazing lengths to demonstrate his borrowing capacity.

On a standard low doc loan application, you can assume the lawyer trying to buy the stone house will have to come up with most of the following: two to three years' worth of tax returns, a business credit report, year-to-date profit and loss statements and a current balance sheet.

"It can cost you thousands of dollars to prepare that kind of documentation," says Mr. Miller, whose 1991 edition of "The Common-Sense Mortgage" deals at length with the issue of mortgage documentation.

The assumption behind the low doc loan was that someone with a big down payment was a good enough financial bet for the lender that he could be spared the kind of rigorous documentation usually required.

On a more or less good faith basis, he would be allowed to take a mortgage with a minimum of proof that his income and assets were what he claimed.

Regrettably, more than a few people took advantage of low doc mortgages and an even less demanding category called "no doc" loans, according to mortgage experts.

They claimed income or assets that they didn't really have and, ultimately, many such loans wound up in default or foreclosure, mortgage experts say.

"Because of the abuses we saw occurring industrywide in low doc loans, we started pulling back from these loans early last year," says Robert Engelstad, senior vice president for mortgage standards at the Federal National Mortgage Association.

On Jan. 7, Fannie Mae -- which buys billions' worth of mortgages each year from lenders who originate them -- announced it would cease buying no doc loans altogether.

Last year, a similar decision was announced by the Federal Home Loan Mortgage Corp., known as Freddie Mac, another big player in what is called the secondary mortgage market.

Fannie Mae and Freddie Mac have yet to release statistics on the extent of problems with the no doc program. Still, their decisions to pull back from the low doc program have had a big influence on the mortgage market as a whole.

While they don't buy all the mortgages made in this country, their documentation guidelines are followed closely by lenders throughout the industry.

Even so, a self-employed person who wants a low doc loan shouldn't give up hope entirely. There's no shortage of mortgage money in this country currently, and the recession has slowed business for many mortgage officers.

That means a minority of lenders -- especially mortgage bankers -- continue to offer low doc loans, an attractive option not only for the self-employed but also those in traditional jobs who are loathe to go through traditional mortgage processing.

"Even though they're less common," asserts Mr. Miller, "low doc loans are still out there for those willing to search through the mortgage maze."

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