How does a lender match a client-borrower's profile with a loan?
There is a natural progression of lender products that can be characterized into four categories or types of loans. Each loan specifies a certain borrower profile that determines the borrower's creditworthiness, rates and terms.
1. Full Documentation Loan (Full Doc)
This is the foundational or most fundamental of all loans. The full-doc loan is designed for a client-borrower with high credit scores, employment and full income and asset documentation. Income level supports all existing debt as well as the new mortgage debt. This is the kind of borrower lenders like, and they make their rates very attractive. Fannie Mae and Freddie Mac base their rates on this highly-desirable borrower.
2. Stated Income Loans
The second loan type is one for which lenders charge higher rates and fees because eligibility is based upon stated income. The borrower states their income, but does not verify it with tax returns or other information. They will be required to furnish proof of assets. The borrower must still have a high credit score, and high assets as well as two years consistent employment within the same field.
3. Stated Income/Stated Assets
The terms of this type of loan still require a high credit score but compromise on full income and asset documentation. The lender charges a higher rate to execute this type of loan.
4. No Documentation (No Doc) Loan
This is the most expensive loan for those who do not meet the criteria for the first three types of loans. This borrower typically has moved from a W-2 to self-employed status within a two-year period. The previous three loan types require continuous employment in the same field for two years. Eligibility of the borrower is still credit-driven. The good news is the borrower can refinance in two years.
