Documentation Disasters of Down Payment Monies: Case #1

Recently I wrote an article titled, “Buying A Home? Down Payment Tips You MUST Know!” That article covered the basics of what to do and what not to do when it comes to documenting a home buyer’s assets.

Last month I processed two files for which proper documentation of assets were extremely burdensome and time consuming. to properly document assets. Mind you, the difficulty was not only for me, the processor, but for the home purchasers as well. A lot of the hassle could have been easily avoided had the home buyers worked with the loan originator to ensure funds were being managed properly.

Here I’ll lay out what occurred with the first of these two files, what resulted from those actions, and what could have been done to avoid the issues.

Names have been altered for privacy concerns.

Case #1 - Mr. & Mrs. White: Income or Gift?

The asset documentation on this file became a nightmare for these folks. While their loan DID close and they are now happy homeowners, a tremendous amount of stress and worry could have been avoided. Here’s a summary of what occurred:

  • The Whites are self-employed, running an S Corporation
  • Their business is focused on consulting and management
  • The husband manages restaurants, and ththe restaurant owner pays the S Corporation, and the S Corporation pays Mr. White
  • Prior to getting under contract to buy a home, the Whites established how much money they needed for their down payment and closing costs
  • At that time, they did not have enough money to purchase a home
  • In order to assist Mr. White, a restaurant owner agreed to pay him bonuses early
  • However, instead of paying the owner paying tthe business (S Corporation), directly as per normal protocol, the restaurant owner paid Mr. White directly out of her personal bank account
  • Mr. White deposited the bonus checks into his personal account (the same account from which the earnest money deposit came), which triggered the requirement to review the personal bank accounts in detail
  • The “large deposits”, which were three deposits totaling $25,000, were discovered
  • Instead of being able to consider the deposits income, as they should have been, they now needed to be considered gifts, because the monies were paid directly to Mr. White rather than to the business
  • FHA allows gifts from employers and/or a person who has close personal ties to the home buyer, but proper documentation must be provided
  • FHA requires that the person providing the gift(s) must provide proof that THEY have the ability to provide the monies to the home buyer (FHA’s reasoning is to ensure no one is borrowing monies in order to meet down payment requirements)

So what additional documentation requirements resulted from the restaurant owner paying Mr. White directly versus paying the business?

  1. FHA required the lender to prove there is a relationship between Mr. White and the restaurant owner, which was accomplished via providing previous payroll journals and other miscellaneous business documentation to show they had an ongoing relationship
  2. FHA requires the completion of a gift letter to document that there is no expectation of Mr. White having to pay the restaurant owner back
  3. FHA requires that the person providing the gift has to prove that they have the capacity to give the gift, so the restaurant owner had to provide their personal bank statements to prove they had the funds available to give to Mr. White (can you imagine asking your boss for his or her personal bank statements?)

Obtaining all this documentation slowed the entire process down. However, more importantly, Mr. White was put in the very awkward situation of having to request all this documentation from the person for whom he works, who was simply trying to help out.

Had the restaurant owner's business paid Mr. White’s company, none of the above requirements would have been triggered. The restaurant owner in her attempt to help out Mr. White, fell subject to the old adage, “No good deed goes unpunished.”

Be sure to check the blog again soon, as Case #2 will be added.