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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:

List of documents required for purchase money mortgages:

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

Requirements for purchases:

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

Requirements for self employed borrowers (if applicable):

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

The closing

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 previous 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.

Compare this with the typical seller financed mortgage.

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