True reasons for Discounted Mortgage

The true reason that a mortgage may need to be sold at a discount is very little to do with the time value of money, provided that your mortgage carries a market interest rate.

To understand the true reasons that your mortgage may not be worth 100% of the face value, let’s look again what happens when a bank sells their mortgage to Fannie Mae or Freddie Mac. (By the way, Fannie Mae and Freddie Mac only buy from institutional lenders like banks, not from private mortgage owners.)

A mortgage that can be sold to Fannie Mae or Freddie Mac is called a Conventional Mortgage.

Before you can get that conventional mortgage loan from the bank you have to provide certain documentation.

The lender will also require:

  • an independent appraisal
  • a survey showing the property and any encroachments
  • at least 10% cash down payment

List of documents required for purchase money mortgages:

  • Credit reports on all borrowers
  • Uniform Loan application (1003), completed and signed
  • Complete last year and the previous years signed federal tax return forms, and last year and the previous years W2 federal forms
  • Two most current pay stubs within 30 days for each borrower
  • Current evidence of fire / hazard insurance policy
  • Last three bank statements for all savings and checking accounts
  • Non-citizens, need a copy of their green card
  • Award letters (social security, pension, retirement)
  • Evidence of additional income (rental agreements, child support, alimony, military allowance)

Requirements for purchases:

  • Purchase contract
  • Landlord name and address (if borrower has rented within two years)
  • Condo name, management company, address, and phone number (if condo)
  • Recorded documents (quitclaim, death certificate, divorce decree, leasehold)
  • Explanation letter for any gap in employment over one month within the past two years
  • Gift letter for gifted funds
  • Bank deposit receipt by donor, proof of where the down payment came from

Requirements for self employed borrowers (if applicable):

  • Last year and the previous years signed federal corporate tax returns
  • Last year and the previous years signed federal partnership tax returns
  • Last year and the previous years and current (calendar or business year) year to date (YTD) signed Profit and Loss Financial Statements
  • Current year to date (calendar or business year) signed state tax return forms
  • Evidence of payment of year to date (YTD) state General Excise Taxes (canceled checks)

The closing

The mortgage loan will be closed by a title company or an attorney.

Standard documentation will be used that is acceptable to the secondary mortgage buyer.

There will be title insurance and all proper documentation to ensure compliance with lending laws.

The Mortgage Investor

As you read in the discounted mortgage page, the ultimate mortgage investor will receive a guarantee from Fannie Mae or Freddie Mac that they will get paid. These organizations also have an implicit guarantee from the Federal Government. In short, they are in many ways almost as safe as government bonds.