Financial Fitness

What do lenders need to know about down payment money?

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When purchasing a home one of the most important aspects of the mortgage application process is proving that you have enough money to pay the down payment and closing costs. This is the part of the process that requires the most documentation, usually, and causes the most delays in closings. Once a sales price has been negotiated and any seller’s contribution towards closing costs agreed to, the lender is going to ask for “acceptable proof” that the buyer has the required down payment and the balance of the closing costs.

The “acceptable” part of the proof is the hard part because people don’t live their financial lives in a  way that a lender wants to see documentation. If a friend repays some money that was owed we take it and say thanks. If we have been saving money at home and now decide we are going to buy a house we put it in the bank. If I decide to sell some things that have been cluttering up the attic to get some extra money for the house I do it. Unfortunately all of those transactions will cause problems with a mortgage application. In the mortgage process if you can’t document the source of a deposit into your account it is not going to be included in the funds needed for closing. There has to be a complete paper trail to prove any deposits into your account. Cash for the most part does not exist in a mortgage transaction because you can’t completely prove the source of cash. Even if it makes sense to you it probably won’t be clear enough to an underwriter.

There are many acceptable ways to get the money for closing. Saving up your pay checks and keeping the money in the bank, borrowing from a retirement account or getting a gift from a family member(or other person depending on the program) all will be allowed as long as there is a paper trail for the deposits. It is vital to keep all statements for all your accounts as you start the process. If you are going to borrower from a retirement account the lender is going to ask for the most recent statement and then for proof that the money has been withdrawn and the terms of any loan(borrowing from a retirement account is OK because the payment is not considered part of your monthly debts). For gifts there are specific guidelines for the documentation required both from the buyer and the donor of the gift so it is a good idea to prepare whoever is going to give a gift for the inquisition into their financial affairs.

These days with so many people using online banking one of the issues is that people don’t keep statements. Most banks give you access to statements online so it is a good idea to check and see how your bank allows access to those. Just the printout of the activity in your account generally won’t meet lender requirements mainly because most online systems don’t identify whose account it is in enough detail for lenders. Some programs now allow funds to be verified by the lender directly accessing your online information. Many people are not comfortable giving a lender that kind of access but it is an alternative in some cases.

Bottom line,  plan ahead for the questions the lender is going to ask and if at all possible have the money in your account for 2 months prior to when you apply. Lenders are generally going to ask for 2 months bank statements at application and if there are no deposits other than paychecks that can be easily proven you will have a hassle free process. The reason for all the questions about the money, besides the fact that investors require it, is that statistically loans where assets are proven have a lower  default rate so lenders want to prove where the money came from.

 

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