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.

If you're considering purchasing a home soon, it is critical to understand the documentation requirements to which lenders are subjected in today’s lending environment. Hopefully, this information will save you a lot time and grief as it pertains to the documentation of your down payment monies (referred to as "assets" by your lender).

As a Senior Loan Processor, documenting assets often times is my biggest challenge in getting a loan fully approved.

Let’s discuss the rules first. As Fannie Mae is the largest backer of conventional financing, we’ll reference their underwriting guidelines. They state:

Fannie Mae Asset Guidelines

When bank statements (typically covering the most recent two months) are used, the lender must evaluate large deposits, which are defined as a single deposit that exceeds 50% of the total monthly qualifying income for the loan. Requirements for evaluating large deposits vary based on the transaction type…

The full guidelines are available here.

Why do Fannie Mae, FHA, VA, etc. even care about large deposits? The answer is simple. These institutions need to be absolutely certain that borrowers did not take out a loan to come up with their down payment monies. New loans can take months to show up on a credit report. Loans from friends, employers, etc. may never show up. New loans impact a borrower’s debt ratio, which is a critical piece of the loan qualification process.

To make more sense of this, let’s take a look at an example to see how this works.

Scenario A

Assume Mr. & Mrs. Smith are both employees earning W2 wages and have a combined $6,000 a month in income.

Monthly Deposits

None of the payroll checks above need documentation. However the $3,500 is more than 50% of the Smith’s monthly income (58.33%) and therefore needs to be documented.

If the personal check came from a family member, the terms for providing the monies to the Smiths will have to be documented. Is the $3,500 a loan or a gift? If it is a loan, what are the terms and how does this impact the Smith's debt ratio? If it is a gift, further documentation will be needed, such as the completion of a gift letter (a form letter lenders use).

If the $3,500 is not from a family member, then who provided the money, and why? Did an asset get sold? If so, documentation proving that would need to be provided.

What happens if it is a gift from a non-family member? Most often those monies cannot be considered, and the lender will reduce the assets of the Smiths by $3,500. This may put their loan approval in jeopardy.

As you can see, this process can get ugly fast. It is critical to note the lender will require two months of bank statements (all pages, even blank pages) and will review each and every deposit in those two months.

Here are some of my tips to prevent getting into documentation difficulty.

1. If you need to use some cash on hand for your down payment, put it in the bank at least 60 days prior to starting the loan application process.

2. Do NOT deposit cash or personal checks without speaking to your loan officer or loan processor first.

3. If you’re self-employed, do NOT transfer monies between your business and personal accounts. Why? You will trigger the requirement to show two months of business statements. Large deposits in those accounts will likely need to be documented as well.

4. Using gift funds from family members as a down payment? Be prepared that they will have to fill out paperwork and in some cases prove they had the money to provide you the gift as well (yuck!).

So the easiest way to avoid documentation work is to have your monies in the bank two months or more prior to beginning the home purchase process. If that’s not possible, then be sure to speak with your loan officer or processor and map out a strategy to document assets properly. It’s okay to use tax refunds, gifts, etc., however, you should know prior to depositing these funds whether you're making the process easier or more difficult on yourself.

Best of luck on your home purchase!

Even with the present condition of the housing market, it is still possible to obtain a mortgage with a low down payment requirement if you know how to go about exploring the available options.

Conventional Loans

Most conventional loans require a 20 percent down payment, but many lenders now offer conventional loans that require lower down payments -- sometimes as low as 5 percent.  Regardless of the loan type, if the down payment amount is lower than 20 percent, lenders usually require the homebuyer to purchase PMI (Private Mortgage Insurance).  PMI is essentially an insurance payment made to the lender as a means to set off any losses the lender may incur in the event that the monthly mortgage payments are not able to be satisfied.  Many lenders will allow a down payment of as little as 5% if PMI is paid.

FHA Loan

The FHA (Federal Housing Administration) is currently offering mortgages with low down payments to qualified applicants.  FHA loans generally require only 3.5 percent down payment from those who qualify, which can keep a lot of money to be used for other things in the pocket of the buyer.  In addition, the interest rates are currently well below 5 percent, which is extremely low by historical standards.   Of course, as mentioned above, PMI is usually required if the down payment is less than 20 percent.

VA Loan

VA (Veterans and Active Military) Loans are special home loans that are given only to those who are serving or have served in the Armed Forces.  For those who qualify, the VA Loan is an even more attractive loan, because it requires little or no money down and may even carry a lower interest rate than traditional home loans, resulting in a lower monthly payment.  In addition, the lending standards for a VA loan are generally more lax, making it easier to qualify for the loan.  For example, retired or active duty servicemen and women may qualify for VA loans with credit scores as low as 580.

Paying More Interest

As long you agree to a higher interest rate, some lenders will allow you exchange the higher interest rate for lower fees, which results in a smaller down payment.  Of course, this means you will pay more interest over the life of the loan, but it could make the difference between your buying the home and having to wait because you are unable to meet the down payment requirement.

Qualifying for a Low Down Payment

In order to be considered for a low down payment loan, you generally need to have:

• Sufficient income to cover the monthly mortgage payment(s)
• Sufficient cash available to cover the down payment, closing costs, and related expenses
• A credit score and history that indicates your willingness to pay
• A current appraisal which shows the property value is equal to or greater than the purchase price
• In some instances, a cash reserve equivalent to two monthly mortgage payments.

Fair Lending Is Required by Law

The Equal Credit Opportunity Act prohibits lenders from discriminating against credit applicants in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age, whether all or part of the applicant’s income comes from a public assistance program, or whether the applicant has in good faith exercised a right under the Consumer Credit Protection Act.

The Fair Housing Act prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex, handicap, familial status, or national origin.

Under these laws, a consumer may not be refused a loan based on these characteristics nor be charged more for a loan or offered less-favorable terms based on such characteristics. 25 2012-06-15 22:40:41 Paying Bills Down Almost everyone has bills to pay every month.  There are credit card bills, utility bills, car payments, mortgage payments, etc.  While it is very important that you pay at least the required minimum on all bills as they become due, break the habit of paying only the minimum required each month.  Paying the minimum is exactly what the banks want you to do.  The longer you take to repay the charges, the more you pay to them in interest, and the less cash you have in your pocket.  You can reduce the total amount of interest that you pay if you "bite the bullet".  Pay more than the minimum, apply the additional payment to the bill with the highest interest rate, and you can begin to pay down your bills and work toward getting them paid off.

Now that you understand the need to make more than the minimum payment each month, here is one approach you can take to pay down debt:

1. Look over your loans and credit cards and see which account has the highest interest rate.  This is the account you want to pay down first.
2. Make the minimum required payment on all accounts except the one which has the highest interest rate.  Pay as much as you can toward this specific account.  You'll find the next month's bill is slightly less than usual, thanks to the extra amount you paid toward the bill.
3. Repeat this process every month until you have finished paying off the highest interest rate account.  Then move on to the remaining account with the highest interest rate and begin placing all of your extra money toward this bill.  You can really put a dent in your total credit card debt by using this approach.

Planning to make additional payments is easy.  Figuring out where the extra money to make the additional payments is going to come from is the hard part.  There are plenty of ways you can get your hands on the extra money you need.  Here are just a few simple and relatively painless suggestions for saving the extra money you will need:

1. Skip eating out at lunch, and bring lunch from home instead.  This can easily save between $100 and $200 a month.
2. Eat one or two fewer dinners in restaurants each week.  This can easily save an additional $100 to $200 a month.
3. When you do eat out, eliminate appetizers and desserts.  This can save $10 or more each meal.  You can do the math to calculate your monthly savings.
4. At the grocery store, purchase store brand items.  They are generally of the same quality and taste as brand name items, but considerably less expensive.
5. Avoid "impulse" buys.  Ask yourself, "Do I really need this?"
6. We all have "luxuries" and you know what yours are – cut way down on them!
7. In general, stop spending money you don't need to spend.

Make a few sacrifices, and you will find the extra dollars needed to dramatically increase the payments on your debt.  Those increased payments will save you hundreds, if not thousands of dollars, in interest payments.  Is it fun to make those sacrifices?  Of course not, but getting out of debt and being a lot more in control of your personal finances certainly is.

When considering the sources of funds for down payment and closing costs, different types of lenders have different rules. Generally, mortgage lenders want borrowers to meet the down payment requirement with funds they have saved because this indicates that the borrower has the discipline to save.  For this reason, some may restrict the amount of the down payment that is provided via other sources.

If you are planning on purchasing a home, please ensure that as early as possible in your process you deposit or allocate the funds for down payment. Keep in mind that lenders will try to determine the source of funds by tracing the funds back to their origins.

Conventional Loan

A conventional loan requires the borrower to verify that they have at least 5% of their own funds for the down payment.

FHA Loan

The Federal Housing Administration (FHA) allows for the entire down payment to be a gift.

Some of the more common sources which the FHA considers to be acceptable for down payment funds are cash from personal savings and checking accounts, cash saved at home, savings bonds, IRAs, 401K accounts, other investments, the proceeds from the sale of personal property, and, as previously mentioned, gifts.  Gift donors are restricted primarily to a relative of the borrower, but they can also be certain organizations, such as a labor union, a governmental agency, or a non-profit organization.

Buyers are prohibited from receiving down payment money directly from sellers, but buyers can receive down payment money as gifts from nonprofit agencies. A possible approach is for the seller to contribute the down payment (plus a fee) to a nonprofit agency; then, at closing, the nonprofit agency may give the down payment to the buyer.

In any case, the giver must provide a "Gift Letter," which states that the funds are a gift to you for your down payment and that you do not have to pay it back. If you did have to pay it back, the lender would look at that as increasing your debt ratio, which may adversely affect your ability to secure a loan.

There are other programs available through non-profit agencies and/or your local, state or federal government called Down Payment Assistance (DPA) programs.

Another source for down payment assistance are grant assistance programs such as the Nehemiah program that you do not have to pay back.  You can get as much as 6% of the final contract sale toward down payment or closing costs.

Many states and cities have bond programs that provide down payments for homebuyers.

If you are relocating at the request of your employer, find out if your company offers programs to assist in paying for part of the down payment and closing costs. Many large corporations offer such programs as employee benefits.  Even if you work for a small company that does not have such programs in place, you may still be able to negotiate for some relocation assistance.

It is important for borrowers to understand that in addition to these rules, down payments are also governed by the FHA’s rule on closing costs. According to FHA home loan guidelines, the closing costs cannot be considered as part of the 3.5% down payment requirement.  FHA Mortgagee Letter 2008-23 states, “Closing costs are not considered in the mortgage amount/down payment calculation for purchase money mortgages.”

Each type of mortgage and lender has different guidelines for what are allowable sources for down payments.  Consult with your mortgage professional to discuss your down payment options in detail.

*Disclaimer – Loan guidelines change often and may have changed; be sure to consult with your lender about current requirements.

The two most common mortgage loans, conventional and FHA, both require a minimum down payment along with proper documentation of these monies. If you desire to use one of these programs, here are a few tips on how to meet guideline requirements.

Down Payment Savings Account
A great way to fast track your savings is to set up a separate account for the sole purpose of establishing enough down payment funds. The psychological benefits of a separate account are many. First, you know exactly where you stand in meeting your down payment requirement. Second, keeping your down payment funds separate from your day-to-day spending account, makes it more difficult to inadvertently tap into these funds.

Convert “Mattress Money” into Down Payment Money
Using cash on hand, often referred to as mattress money, is normally not allowed by lenders as a source of down payment. Remember, debt ratio guidelines are strict and the lender must ensure that the borrower didn’t go out and borrow money for their down payment. If you have cash that can be used for your down payment, the easiest thing to do is to get these funds into a bank account at least two months prior to the purchase process. This will make it easier for you and your lender to ensure you will meet underwriting guidelines.

Converting an Asset into a Down Payment
One way to come up with down payment monies is to sell an asset, such as a car that’s paid off. Remember though, you will need to document where these monies came from, so be sure to have a bill of sale, make a copy of the title, and keep a copy of the check used to purchase the item from you. As mentioned above, cash can provide a documentation obstacle, so avoid any issues up front by documenting everything you can if you plan to sell an asset for this purpose.

Retirement Accounts
Prior to tapping into these funds, be sure to get professional advice as to whether this is a smart use of an asset. Additionally, realize that if you convert retirement monies into down payment funds, any payment that results from doing so will likely need to be counted in your debt ratio and can impact your ability to qualify; so be sure to carefully research payment options and speak with your lender on the impact of any new payments.

Gifted Funds
The gift of a down payment is used quite often and can be a great way to meet down payment guidelines. If you have the opportunity to be gifted funds, be sure to check with your lender that the person gifting you monies is allowed per your loan program. Additionally, take the time to research and understand the tax implication for both you and the person providing the gift.

Is Time On Your Side? 
Lenders will normally only require bank statements for the most recent two months as proof of funds; so if you have cash, plan on selling an asset, taking money out of retirement funds, or getting a gift from someone other than a family member, a simple solution is to put these monies into a bank account ninety days or more prior to starting the purchase process. By doing so, these monies will have been in your account long enough to satisfy a lender’s requirement to document down payment monies. In general, if you can show you have the capacity to have held the required monies for an extended period, the original source of the monies isn’t an issue.

Many people will be receiving good-sized tax refunds when they file their income taxes for 2013.  Saving enough money to cover the down payment on a home is often the primary stumbling block when people want to become homeowners.  With mortgage rates at or near record lows, it may make financial sense for first-time borrowers to use their tax refunds as a down payment to purchase a home that often carries lower monthly mortgage payments than what they pay in rent.  It also may make sense for people who are currently homeowners to use their tax refunds to enable them to upgrade to other homes.

The Down Payment
A sizeable refund might be enough to get you into a Federal Housing Administration (FHA) loan, which requires a down payment of as little as 3.5%. If you already have some money saved, that money, when combined with your tax refund, could even be enough to get you over the 20% down payment threshold so that you can avoid paying for Private Mortgage Insurance (PMI).  If so, that could be a great use of your money, because in addition to building equity in your new home, you’ll realize additional savings by avoiding PMI.

According to the Internal Revenue Service, the average tax refund for the 2012 tax year (2013 filing season) was about $2,650.  Borrowers who are able to qualify for an FHA loan would have to come up with about $6,300 for a 3.5% down payment for a home with a price of $180,000. The tax refund can certainly help, even if it doesn't cover the entire down payment.

If you already have enough money for the down payment on a home, you can use the refund in order to help you meet the cash reserve requirements of your lender, or to beef up your maintenance fund for home repairs.

A Tax Refund meets the Requirements for Mortgage Down Payment Funds
Most mortgage programs require that the money you use for your down payment be “Sourced and Seasoned”.

"Sourced" means you have to show where the money came from.  Your down payment and closing costs must come from the proper source.  Generally, a proper source is a bank account, savings account, retirement fund, etc.

"Seasoned" means that you have to show that you had the money in your account(s) for 60 days, which is why the lender asks for two months of bank statements when pre-qualifying a borrower for a home mortgage.

There are a few sources however, which are considered acceptable sources and fully seasoned even if the funds were received very recently, e.g., even in the past few days.

Three such sources are:

1.  Tax Refund – A copy of the Treasury check and a bank receipt showing the deposit are acceptable to prove sourced and seasoned funds.  If the refund was automatically deposited into the account, i.e., if there is no check, a notation on the bank statement will suffice to show that it is a tax refund.  In the case of automatic deposits, the only documentation necessary is the bank statement.

2.  Insurance Award – If you are the recipient of an insurance award, this check is considered sourced and seasoned.  Again, be sure to make a copy of the check and the deposit receipt showing the deposit into your bank account.

3.  Funds from the sale of personal property that you own.  You will need to produce a receipt for the sale of the item and a deposit receipt showing the deposit into your bank account.

Notes:

1. If you supply a bank statement for deposit verification purposes, be sure that you are prepared to document any deposits that are out of the ordinary.  For example, payroll direct deposits are normal, whereas an underwriter would likely require an explanation for a $500 cash deposit.

2. A cash advance or short term loan to cover an EXPECTED tax refund IS NOT an acceptable source of funds for a down payment or to close.

The cash required in order to close is often the very last step in closing escrow on your new home.  You don't want to be running into any problems regarding funding at the last minute.  As always, it is recommended that you keep your loan officer fully informed regarding any financial matters throughout the mortgage lending process.

Another piece of advice - if you are considering using a tax refund to buy a home in the near future, it's a good idea to get with your loan officer to get pre-qualified and to start shopping early, before millions of people get their tax refund in April and begin competing with you for the same home.