Documentation requirements are the set of lender requirements that specify how information about a loan applicant's income and assets must be provided, and how it will be used by the lender, and whether and how the information provided will be verified by the lender.

Verification is of three general types.

• “Stated” means that there is no direct verification of the borrower’s income, however lenders may or may not require that applicants sign a form authorizing the lender to request the applicant’s tax returns from the IRS in the event the borrower defaults.
• “Fully verified” means that income and assets are disclosed and fully verified, but also that the income so disclosed and verified has come from a consistent source for 2 consecutive years. The borrower must have had the same employer for that period, or if self-employed, must have been in the same business. The lender obtains written confirmation from the employer and/or bank.
• In-between these extremes, lenders may accept evidence provided by the borrower, such as W2s and tax returns, or verbally by an employer or by the CPA of a self-employed borrower.

Because lenders view loans with weaker documentation as riskier, they often vary their documentation requirements with other features of a loan that affect risk, such as the loan type, down payment, loan purpose or credit score.

For example; a lender might require full documentation on investment loans but allow more liberal documentation on loans to purchase the buyer’s primary residence. Lenders have realized that many consumers with the potential for home ownership were shut out of the market by excessively rigid documentation requirements. Lenders also recognized that documentation could be viewed as a risk factor that could be priced or offset by other risk factors.

Full documentation is the least risky to the lender, no docs is the most risky, and the others loan types are in-between. If the documentation is riskier, lenders will charge more, require risk offsets, or both. The most important risk offsets are large down payments and high credit scores.