Refinancing a Mortgage: The Application Process

In the past, when it came time to evaluate a prospective loan applicant, a very personal approach was taken, with a human manually reviewing the loan application. Today, almost all lenders now use an automated underwriting system(AUS.)

A Look at Automated Underwriting Systems

The AUS automatically reviews and evaluates the loan application and credit history of the applicant, as well as the total amount of the requested loan, using a mathematical formula to determine eligibility. The entire process only takes a few seconds and it either does not approves the loan or marks it as a Strong File or Weak File. A Strong File indicates that the application meets the loan requirements and does not require any additional documentation. A weak file, on the other hand, indicates that there were some discrepancies or problems with the application, so more documentation is required.

For example, someone with a strong file, might not need to provide any employment documentation or tax forms, while someone with a weak file would.

While the loss of a personal touch in the underwriting process definitely has negative connotations, one of the nice things about using an AUS is that initially, there is often no need to provide any documentation.

What Type of Documentation is Required for a Refinance Loan?

Depending on how the Automated Underwriting System evaluates the application, there are three basic levels of documentation: Full Documentation, Stated Documentation, and No Documentation.

Full Documentation loans will require that all aspects of the application are verified by a third party. Generally, this means providing tax forms, such as the past few years W2s and paycheck stubs. The lender may also require that the applicants bank verifies the loan using a Verification of Deposit(VOD) form. Typically, the full documentation loan is the most common type of refinance loan.

Stated Documentation loans are when the lender simply uses the information that is provided on the loan application, without actually verifying it with a third party.

No Documentation loans, as the name implies, are loans that require no documentation. The lender does not request any banking or employment information, as well as not running a credit report.

Can the Consumer Decide the Documentation Level to Provide?

In some cases, the consumer does has some control over how much documentation they provide. Of course, from a literal standpoint, they are free to provide no documentation at all, but the lender is under no obligation to offer a loan in this case. Instead, it is almost always up to the lender to determine how they will document the mortgage application.

With that said, some lenders do offer a no documentation loan, but they will usually require a 20% down-payment and the mortgage will have a higher interest rate.

In the end, the lender is out to make money, so while they may be willing to forgive a minor digression on ones credit report, they will only do this if they think it is profitable. Anytime they do accept a risk, such as not checking employment, the lender will usually increase fees or rates to counterbalance this risk.