Just One More Paystub – Promise!
by Evan Vanderwey on 23/04/10 at 3:55 pm
At Cornerstone Home Loans, we are preparing our customers today like never before that the process is excessively heavy on collecting more and more documentation to approve a loan and clear it for funding. Many believe that the main reason for this is to prove a borrower’s credit worthiness. But in reality, credit worthiness has little to do with it.
You take an hourly employee who has shown two consistent paycheck stubs and last years W2 form to prove his income to the bank. He gives us three months of bank statements to show his down payment money saved up. He has a 785 middle credit score and has never missed a rent payment says his land lord. Slam dunk deal right?
Well yes, and no.
We all know that this home owner is very likely to be a successful homeowner who pays off his home in time. Why then is the lender asking for 12 months canceled checks to prove that rent was paid on time, and the copies of checks for all deposits over $1000 into his bank account?
It’s NOT because they think the borrower is a bad risk.
The reason for all of the extra paperwork is that the bank is afraid that after they sell the loan to Fannie Mae or FHA (which means that they get their money back that they gave at the closing) that at some point in the future, they will be handed the file back due to missing information – and be forced to pay the loan money back to Fannie or FHA.
Can they really do this? Can FHA – once it has approved and paid for a loan, really pull their assurance later? Yes! Paul Muolo of the National Mortgage News found that “not only are Fannie and Freddie (and FHA) forcing buybacks on seller servicers that sold them mortgages that eventually went south, in some cases they are asking for repurchases on performing notes – when it is discovered that these mortgages violated the term sheets”
That means the banks who are approving mortgages these days are not nearly as afraid of their borrowers failing to pay as they are afraid of Fannie, Freddie or FHA calling and asking for their money back.
Think about this for a minute:
~ A bank makes a favorable loan decision and lends money to a home owner for the purchase of a home.
~ That home owner pays his mortgage payments on time for three years.
~ Fannie Mae, who gave the bank the money for that loan, finds that the original file had two paycheck stubs in it for the borrower covering a 28 day period because the borrower is paid every two weeks. The”‘term sheet” from Fannie Mae says that they require “30 days of paystubs”. 28 days is not 30 days.
~ Fannie Mae (ie the Federal Government) decides that they want their money back.
~ Fannie forces a “buy-back” on that bank.
~ The bank pays it back
(~ The bank used TARP money to pay it back?)
Now come on, that would be just silly!
Except that its true.
When you are asked yet another paycheck stub - please get it to us quickly. But don’t take it personally. Its not you they’re afraid of.
