An old friend and client walked into my office the other day, looked at me sort of puzzled and asked "Why do lenders keep asking for stuff even when they tell you they don't need anything else?" This from a developer who has seen more than his fair share of real estate closings.

And that's a good question. In fact, odds are that it's happened to you when you were buying or refinancing your last home. You get a call from your loan officer who gives you the good news that you're "approved." Or at least "approved" under certain conditions.

These conditions may be something simply such as one more paycheck stub or providing adequate insurance coverage for the home being financed. No big deal there. But my friend's question really didn't have anything to do with a standard conditional item. Instead, he related a story that one of his homebuyers recently experienced.

The buyer was asked to provide specific information, which included three months bank statements, and the buyer directly asked "Is this all you're going to need?" and the loan officer said "Yes, that's all the underwriter has asked for." Sure enough, two days later, the loan officer called again wanting more information.

"I thought you said you had everything you needed" the buyer responded. Good answer. Indeed the loan officer plainly stated that nothing else was needed but in fact more was needed. What happened?

When loan conditions are forwarded to the underwriter for review, the first thing the underwriter will do is verify that what was asked for was what was returned. If the underwriter asked for three months most recent bank statements but only got two, you can expect the underwriter to contact you again for that third statement. But in my friend's case it was a little more than that.

You see, the buyer was self-employed and was the sole proprietor of a marketing company. The bank statements he sent to the underwriter were bank statements from his business, not from his personal account. So what, you say? Money to close has to come from an individual, neither from a business nor from another loan. The underwriter wanted three months bank statements from the individual's account, not from the business.

The buyer explained that he in fact controlled 100 percent of the company and had access to those funds any time he wanted. True enough. But that opened up another question; can the business survive when $80,000 is removed for personal purposes? Can the business make payroll when such a sum is withdrawn? How about all accounts payable for that matter? Will the business be adversely affected in any way or shape by having its cash reserves nearly depleted (as they were in this case) … or that the buyer would have to "pay" the business back in the future?

So the buyer had to get a letter from his accountant stating that the buyer had 100 percent control of the funds, that the business would not be affected and the funds were not borrowed from the business.

All of that because of bank statements. So, the story went, the buyer provided all that was needed and he lived happily ever after. Those bank statements also showed a large deposit of $55,000. Anyone who's been around the lending block a few times knows that single, large deposits look like a possible loan. After the buyer answered the questions about the business checking account, he thought it was all done. Not so. Now he had to explain where the $55,000 came from.

All after his loan officer said "we don't need anything else from you." Yeah, right. But let me explain how this could have been avoided.

When a lender asks for some documentation, there's a chance that documentation can raise other issues. For example, if a borrower puts on her application she makes $5,000 per month but she provides a paycheck stub that shows otherwise, the underwriter will want an explanation as to the discrepancy. Yes, she provided the paycheck stub just as the lender asked, but that stub raised a red flag, requiring more information.

If the loan officer reviewed the paycheck stub and compared it with the application before going to the underwriter, the discrepancy would have been avoided. The very same way the loan officer should have reviewed the bank statements for my builder's client. That's why lenders keep asking for more stuff, when the stuff the buyer provides raises more questions than answers.

Published: November 19, 2004

Use of this article without permission is a violation of federal copyright laws.

, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.