Section X – Information for Government Monitoring Purposes
Special Notice for Balloon Mortgages – For each balloon mortgage, Fannie Mae requires that the following notice, in capital letters, regarding the nature of the balloon features must be included on the application form or in a separate attachment to the form signed by the borrower(s):
THIS LOAN MUST EITHER BE PAID IN FULL AT MATURITY OR REFINANCED TO A MARKET LEVEL FIXED-RATE MORTGAGE. YOU MUST REPAY THE ENTIRE PRINCIPAL BALANCE OF THE LOAN AND UNPAID INTEREST THEN DUE IF YOU DO NOT QUALIFY FOR THE CONDITIONAL RIGHT TO REFINANCE AS SPECIFIED IN THE NOTE ADDENDUM AND MORTGAGE RIDER. THE LENDER IS UNDER NO OBLIGATION TO REFINANCE THE LOAN IF QUALIFICATION CONDITIONS ARE NOT MET. YOU WILL, THEREFORE, BE REQUIRED TO MAKE PAYMENT OUT OF OTHER ASSETS THAT YOU MAY OWN, OR YOU WILL HAVE TO FIND A LENDER, WHICH MAY BE THE LENDER YOU HAVE THIS LOAN WITH, WILLING TO LEND YOU THE MONEY. IF YOU REFINANCE THIS LOAN AT MATURITY, YOU MAY HAVE TO PAY SOME OR ALL OF THE CLOSING COSTS NORMALLY ASSOCIATED WITH A NEW LOAN EVEN IF YOU OBTAIN REFINANCING FROM THE SAME LENDER.
Once the application is complete, it is processed. Loan processing is the preparation of the loan package (i.e., the application and supporting documents) for underwriting. It includes the collection and verification of detailed information about the borrower and the real estate transaction itself to help determine the borrower’s ability and desire to repay the loan. If any information appears suspicious, the processor or originator should attempt to verify it with the source or take appropriate steps to have the application denied.
Key steps in processing include the following:
- Creating a loan file. The processor may use:
- a processing checklist to list needed documents and indicate when they are in the file;
- a conversation log to record conversations with the borrower or third-party vendors; and
- a particular stacking order so that all documents are in the same location in each file making it easy to locate file documents
- Ordering required verifications and supporting documents
- Reviewing all documents to ensure:
- disclosures are accurate, properly delivered and, if necessary, updated; and
- verifications and supporting documents match the information on the loan application (e.g., Social Security numbers are consistent, names on the title commitment match that of the borrower[s], all liabilities shown on the credit report with more than 10 payments [10 months] remaining are included in the application, etc.)
- Updating the application to match the information provided in the verifications and supporting documents
Limited Documentation (Alt-A)
Applicants not able or willing to provide details of their finances or to otherwise satisfy standard conventional loan guidelines have been able to get Alt-A loans despite providing no documentation or only limited documentation. This type of processing has been useful in qualifying an applicant who is self-employed, is paid on commission, or is recently divorced and lacks payroll stubs, W-2 forms, 1099s or other documentation showing qualifying income from the past two years.
When Alt-A loans were made available to borrowers with low credit scores, their rate of default and foreclosure soared, so these loans are not prevalent now. New amendments to the Truth in Lending Act’s Regulation Z require documentation of a borrower’s ability to pay for most available mortgage loan products, which includes verification of income, assets and employment using reasonably reliable third-party records.