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2009 FHA Blog Part 2: Cover Your Assets! FHA Documentation Requirements for Down Payment

By
Mortgage and Lending with Fifth Third Bank NMLS #457556

Tight markets = Tight underwriting, simple as that.  Let's touch on one thing that comes up time and time again on FHA purchases: Funds to close.

In working with almost solely FHA loans on a daily basis, it has become clear to me that my next installment here must cover the documentation of assets.  A failed attempt at asset documentation can send that red flag up the pole real quick if not careful.  When I step into a "conventional fallout" situation this is one of the biggest obstacles I have to overcome in many cases. With these declining market restrictions, documenting 3.5% down payment is certainly a whole lot easier than 10%+ for many homebuyers.

Cash in the bank

Sounds simple enough right? Well...how it got there, when it got there, amounts added or subtracted along the way or transferred from one account to another are all very important items to examine.  FHA Underwriters are trained to not only make sure $x are there but to adequately source $x in all circumstances.  Why does it matter so much you may ask?  With a tough housing market, underwriters now more than ever want to make certain that none of the funds are from ineligible parties like that seller who really needs to sell his house!  When HUD eliminated seller-funded down payment assistance last fall, they became more diligent than ever to make sure that buyers and sellers are in no way trying to circumvent this.  All the sourcing difficulties I've encountered have been purely innocent but when I had to prove a deposit was a Christmas gift from a borrower's grandmother, it became clear to me that the simplest things you would never think twice about certainly makes you think!  

Let's start with the bank statements---Make sure you provide all pages of the bank statements.  I know the banks do not always make this convenient with double-sided statements and some pages may seem to provide nothing of documentable value but if they just see page 1 of 6, 3 of 6, 5 of 6 they automatically will ask for 2, 4, and 6 before they review them.  (Don't worry:  they won't care if you've eaten at the same restaurant 15 times or you've been to the liquor store a few times!)

Now that we have all the pages, let's examine the deposits.  If you have nothing but your periodic payroll direct deposits there and adequate funds to close it's pretty simple.  But as experience dictates, it's not always that simple. 

If, for example, you have widely varying income/deposits like monthly commissions that are not direct deposited for the underwriter to clearly see they are from employment, save your paystubs beyond just your last two to document source.

 If you have transfers back and forth to another account, provide those bank statements as well even if you do not intend to use funds from that account.  If you have other miscellaneous deposits of any size, be prepared to document the source, even if you have the FHA required 3.5% down payment without counting those miscellaneous deposits...I will address gifts here shortly.

Earnest Money Deposit

If you put down a deposit with your contract as most buyers do, you obviously intend to have it credited toward your amount due at closing.  For the underwriter to grant that credit, this money must be verified as your funds or gift funds documented accordingly.  If the seller does not accept personal checks go with a cashier's check and avoid money orders.  Document the withdrawal of funds for the cashier's check and make a copy of it before submitting the check.  For a personal check the underwriter must see a copy of the check AND either an image of the cancelled check evidencing withdrawal from your account or your bank statement showing that check being withdrawn where they can match up the check number with the copy of the check.  Money orders make it very difficult to prove where the money came from and depending on the money order vendor may or may not show who they were paid to. 

Gifts

Gift funds from an immediate family member are a perfectly acceptable source of down payment funds for an FHA loan.  The gift does not have to be entirely from 1 family member.  I am currently working on a loan where a brother, sister, and mother are each providing 1/3 share of the total 3.5% down payment requirement.  The key is having a gift letter properly completed, (don't worry we have a standard form to make it easy), and the transfer of funds properly documented. 

We need to:

•1)      prove the donor has the funds to give (bank statement)

•2)      evidence the withdrawal from the donor's account

•3)      evidence the receipt of the matching amount

401K Funds

You can use 401K funds in the form of a loan or a withdrawal for required funds to close.  We also use them quite often to simply document reserves with no intent to withdraw the funds.  It can sometimes make a difference if your debt-to-income ratio is a little higher than the guidelines.  If we use 401K funds for either source of funds to close or for reserves we still need to obtain proof of the terms under which funds may be withdrawn.  Like the bank statements, provide all pages of the most recent statement that clearly shows your name, employer, statement period, any outstanding loans you have, vested balance, and the specific type of assets held in the account.  I know this may sound like common sense but you would not believe how many people have sent me just a screen print snapshot from accessing their account online that has nothing on it to clearly identify who it belongs to. 

When withdrawing funds to close, the proceeds check must evidence sufficient net proceeds (after penalty for early withdrawal and federal taxation) to close the loan when combined with other verified liquid assets.

When borrowing against an employment savings plan, a copy of the loan agreement and proceeds check are required.  Also, it is important to note that loans against 401k or similar employment savings plans are not counted as an obligation in calculating debt ratio for an FHA loan

What can I NOT use?

 

It is also important to point out what has been defined as unacceptable sources of cash to close:

None of the following is considered to be cash:

• Proceeds of a personal or unsecured loan.

• A gift that must be repaid in full or in part.

• A cash advance on a revolving charge account or unsecured line of credit.

• Cash for which the source cannot be verified (cash on hand).

However, it IS perfectly acceptable to pay for your appraisal with a credit card

In conclusion, there are a number of other miscellaneous sources of down payment that can be used that we see on a case-by-case basis with less frequency.  If you have any questions about whether the source in your case is acceptable just ask.  Knowing what you need up front is much easier than scrambling at the last minute to overcome an underwriter's apprehensions!

Happy house hunting to all! 

 

Anonymous
Nancy

Define assets for FHA loan...What type, how much are they looking for, etc...

Oct 20, 2009 01:51 PM
#1
Kevin Weaver
Fifth Third Bank - Cincinnati, OH
an experienced mortgage professional NMLS #457556

Hi Nancy,

Thanks for reading.  The specific type of assets the underwriter is looking for are your liquid assets  in checking or savings accounts. If you are liquidating other assets like stocks, for example, then they would ask for evidence of those assets as well and proof sold to convert those to liquid funds.  If you are borrowing against your 401k, they likewise ask to provide the terms of the withdrawal or loan.

FHA requires 3.5% of the purchase price down.  They do not necessarily require reserves.  How much you need in addition to that 3.5% will depend on the closing costs, whether the seller is paying any or all of those costs for you.  Closing costs do vary based on locality in terms of title insurance, transfer taxes, and escrow fees.  A Good Faith Estimate to provide you with a estimation of your cash required is always the 1st step I take after completing your application.

Let me know if I can answer any further questions for you.

-Kevin Weaver

Oct 21, 2009 04:15 PM
Anonymous
Candace

Can a borrower use a documented employer payroll advance as a source of funds for a a FHA loan?

candace

Jun 10, 2010 04:08 AM
#3
Kevin Weaver
Fifth Third Bank - Cincinnati, OH
an experienced mortgage professional NMLS #457556

Hi Candace,

Very good question!

Unfortunately, a salary advance cannot be used for cash to close.  The FHA Handbook treats this as an unsecured loan.

Below is a link to that section in the handbook that provides additional answers to asset-related issues....Let me know if I can be of further assistance to you.

http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.5.B.8

Jun 10, 2010 04:52 AM