Is it beneficial to simplify the mortgage application process?

Q: If there’s a choice between a full docs mortgage application and a bank statement application, which will make the most sense for the typical borrower?

A: There has always been a quest to deliver as little paperwork as possible to mortgage lenders, a quest sometimes encouraged by lenders themselves. During the mortgage meltdown, for example, lenders marketed such things as NINJA (no income, no job, no asset) mortgage applications. These applications allowed lenders to approve loans with both less underwriting vigor and higher markups.

The usual reasons to provide less paperwork often include claims of “privacy” or an aversion to recordkeeping.

In fact, as a borrower it likely benefits you to provide a fully-documented loan file. I’m aware that this sounds like financial sacrilege to some, but there are reasons to prefer a hefty loan application file.

First, the 2010 DoddFrank legislation was designed to remove as much risk as possible from the mortgage lending process. It requires — among other things — that lenders verify the ability of borrowers to repay their loans. Lenders who fail to do a proper job can be forced to buy back loans, pay fines, face very unpleasant lawsuits and maybe lose their licenses.

The result is that when a borrower walks through the door with a file full of documentation the lender is elated.

Second, there’s less paperwork required today than in the past. Not less documentation, but less paperwork. For example, borrowers are typically required to provide bank statements and tax returns to lenders. Today the requirement for such documents remains in place but now — with the borrower’s permission — lenders can get statements directly from banks and tax transcripts from the IRS.

This is a big deal for lenders. They can get information untouched by the borrower, meaning the documents cannot be altered.

Third, if a loan becomes distressed it’s tough for a lender to complain about the borrower when so much information was made available. Paperwork is a good protection for borrowers. And lenders.

Fourth, bank statements may lead to lender questions. A sudden cash deposit, for example, may be an underwriter red flag. Overdrafts can also be an issue.

Some loan programs accept bank statements in lieu of other paperwork, generally for those who are self-employed or have their own businesses. You typically need account statements for the past 12 or 24 months as well as business statements for three months.

Bank statements, coupled with good credit and solid cash reserves, can be used by borrowers to qualify for certain programs.

The real point, though, is don’t be distracted by application options. Keep your eye on the bottom line. Compare interest rates, points, application fees, APRs and other factors for bank statement loans with fulldoc loan applications. In particular, look at the Loan Estimate (LE) form lenders are required to provide. Go to page three and compare five-year financing costs.