As a mortgage lender since 1991 it seems like there is one area that tends to be the biggest source of frustration for clients and that has to do with documenting the cash they need to have for down payment, closing cost and payment reserves. I am going to highlight some of the most common challenges we run into in this area.
Why does an underwriter care where a large deposit comes from? As long as I have the cash to close what's the big deal?
Whenever a client has a large deposit that is not a direct deposit of payroll funds, it is necessary to document where the deposited funds came from and whether or not the funds are acceptable to be counted toward down payment, closing cost or payment reserves.
A "large deposit" is at the discretion of the underwriter. However, in most cases if the funds are required to cover the down payment, closing cost or payment reserves, they will need to be verified. The simplest explanation is any funds that are required for closing will need to be verified prior to final approval and closing.
You must be able to show that the source of the funds is from an acceptable source or in some cases the funds cannot be counted causing a delay in closing.
Why does it matter if I get a gift for down payment and why so much paperwork for a gift?
Gift funds are acceptable for some programs and not for others. Before a receiving a gift from a family member or other eligible source, clients should consult their loan officer to make sure it does not change or impair their ability to obtain approval. Clients who use a gift to fund their down payment or closing cost are considered to pose a greater risk then a potential homebuyer who saved their own funds for their home purchase.
How gift funds need to be documented and verified is important. Gifts that are not verified correctly often times cannot be counted toward a clients total required cash investment. It is best not to assume anything when it comes to gifts as the requirements can be very specific depending on each clients individual situation.
In all situations, anytime a gift is involved it typically will need to be verified.
What if I sell something to come up with my down payment?
Selling assets owned can be considered an acceptable source of down payment in some cases. Typically to qualify clients must be able to establish they own the asset, have sold it and received cash from the sale of the asset. With the sale of bigger ticket items such as a car, boat or motorcyle that becomes much easier to do. However, when a client holds a garage sale or is selling smaller assets the process of documenting these funds can be almost next to impossible.
If selling assets is part of how a client will be funding their home purchase it is very important that they talk to their loan officer prior to selling anything. In many cases the sale of assets can be difficult to prove and count toward the clients cash investment.
Is there a problem if I use my cash at home in my mattress for my down payment?
Yes! In almost every case cash on hand or "mattress money" is not considered an acceptable source of down payment. In rare cases where the client does not have any bank accounts at all, cash on hand can sometimes be counted. However, I have to be honest, even though it is hard cold cash, unless you can show where it came from, in most cases it doesn't count.
What are cash reserves and why do I need them?
In addition to a clients down payment and closing cost they may be required to verify they have a certain amount of cash reserves available after making their cash investment. These funds while not collected at closing are required to be verified in order to obtain loan approval.
In it's simplest form some loans require evidence that a client has not exhausted all of their assets to purchase a home and now they no longer have any cash reserves to fall back on should hard times come.
Cash reserves are generally required for clients who own investment property or will not have their current home sold prior to their new home being purchased.
Can I count my retirement funds toward my cash investment or cash reserves?
Yes! Funds in a retirement account can be used toward a clients cash investment, including down payment. These funds can also be counted toward a clients cash reserve requirements assuming certain conditions are met.
If funds from a retirement account are being used as part of a clients cash needed for closing, proof that the client has the money to withdrawl and receipt of the funds prior to closing will be required. Clients should work closely with their lender on what documentation will be required.
If funds from a retirement account are being counted toward meeting a cash reserve requirement, only 60% to 65% of the account balance can be counted. This is provided that a client can demonstrate they can access the funds via a loan or hardship withdrawl. If the funds cannot be accessed via a loan or hardship withdrawl they cannot be counted in most cases. Before assuming that a plan allows for a loan or a hardship clients should verify with their employer the requirements for accessing cash from their retirement account.
Can I take out a loan for my down payment and closing cost?
Yes! A loan for down payment and closing cost can be counted assuming that the loan is against an asset you own (car, boat, rv, etc). The payment for the new loan is required to be counted toward the clients debt ratio but it can be used provided the value of the asset is sufficient to support the new loan (in other words, a new $5,000 loan against a car with a book value of only $2,500 would be a problem).
In addition, loans against a 401k or similar retirement plan are allowed to be used for down payment and closing cost as well.
Personal loans, cash advances from credit cards or loans that are unsecured are typically not allowed to be counted toward down payment.
When it comes to a clients cash needed to close President Reagan said it best when he said "Trust, but verify".
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