A reduced documentation loan is just the same as a no income verification loan, but different.

With a no income (stated) verification loan, you put in the employment information and fill in the gross monthly income section. The lender verifies the employment and assesses if the stated income makes sense for the job. If so, your loan is approved.  This loan program also known as the “liar’s loan”, got a lot of folks into trouble. So, after the mortgage crisis, they started asking for more stuff, such as better credit scores, more equity and more assets.  These things reduced the risk in not verifying the income.  Then, most banks simply did away with the loan.

Most lenders will no longer do stated income or no income verification loans anymore.  What some will do is reduced documentation loans. 

How are these done?  The loan is run through the FannieMae or FreddieMac web site for approval. This is called direct underwriting. When this is done, the computer will give a list of supporting documents they want for the file. The amount of documentation requested depends on the amount of risk assessed by the computer program.  So, if the borrower has really good credit, at least 6 months worth of payments in the bank and has at least 20% equity in the property, there is less risk.  Less risk means less documentation.  Therefore, if the approval says:  “verify income by verbal contact with employer or third party (CPA)” then that is all you need!

As predicted, the loan programs that they complained about are coming back.  Not as strong and not as easy….but they are rearing their ugly heads again.

Be aware:  you will need to sign the IRS Form 4506 so the lender has permission to verify your stated income with the IRS.  Ugh!  You will also need to document your assets. Also, ask how much more the lender will charge.  The answer:  nothing.  There should be no extra fee, if they do not need to verify your income, so do not pay it!

Dale Siegel