When buying a home, it is not enough to just "come up" with the money. With the
exception of "no asset verification" loans, lenders want to verify where the money
comes from. If you can document the funds comes from your personal savings, the
lender is more confident of your strength as a borrower.
In addition, if you can verify you have additional assets that are not needed for
the down payment, it is important to document those, too. Additional assets are
"reserves" you can draw upon during times of trouble, such as unemployment, medical
emergencies, and similar occurrences. Additional assets can also help to document
that you have a history of saving money, which makes you a more dependable borrower.
It is extremely important to completely document the paper trail of any funds you
use for down payment and closing costs. The sections below provide guidance on both
verifying assets and documenting them as a source of your down payment.
Checking, Savings, & Money Market Accounts
The quickest and easiest way to document funds in your bank account is to provide
your lender with copies of your most recent bank statements. Most lenders request
two months bank statements, but some still ask for three. Some lenders still send
a "Verification of Deposit" to your bank in order to determine your current bank
balances and average balance for the last two months. However, that is the old way
of doing business and most lenders nowadays prefer to have bank statements.
If the money you are using for the down payment and closing costs has been in the
bank for the entire period covered by the bank statements, you're fine. These are
known as "seasoned funds." However, if your statements show any large or unusual
deposits the lender will ask you to explain them and document their source.
Stocks, Bonds, Mutual Funds, etc.
Most of those who own stocks get a monthly or quarterly statement from their brokerage.
You will need to supply statements for the most recent sixty or ninety days in order
to document these assets.
Though it is rare nowadays, some people actually have stock certificates instead
of having a brokerage account. When this is the situation, make copies of the certificates
and provide those copies to your lender. You might also want to supply tax records
to indicate you have owned these stocks for some time.
If part of your down payment will come from the sale of stocks and investments,
you will need to keep all documentation that applies to the sale. Provide these
copies to your lender as well.
Gifts
Especially when buying a first home, some borrowers need help coming up with the
down payment. This help should come in the form of a gift from a close family member.
Lenders will require the donors to sign a special form called a "gift letter." The
gift letter states the relationship between the parties, the address of the purchased
property, the amount of the gift, and sometimes the source of the funds used to
make the gift. The gift letter also clearly states that the funds are a gift and
not required to be repaid.
With most lenders, the donor will have to also provide evidence that they have the
ability to make the gift. This can be in the form of a bank or stock statement to
show they have the funds available. You should also make a copy of the check used
to make the gift and keep a copy of the deposit receipt when you deposit the gift
funds into your bank account or escrow.
401K or Retirement Accounts
It is important to provide documentation about your retirement accounts or 401K
programs because this is another asset you could draw upon as reserves in case of
a problem. It is also another way to show you have a savings history. Just provide
a copy of your most recent statement to your lender.
Many people use these accounts as a source of funds for their down payment, too.
Some employers allow you to "cash out" a portion of the 401K and some allow you
to borrow against it. Be sure to keep copies of all paperwork involving the transaction.
If they cut you a check, be sure to make a photocopy of that, too, including any
receipt for deposit into your personal bank account.
If you are borrowing against your 401K, some lenders will count this as an additional
debt to go along with car payments, credit cards and other obligations. This may
seem kind of silly because you are borrowing your own money, but from the lender's
viewpoint it is still a monthly obligation that you must come up with and should
be taken into account. If you are "tight" on your debt-to-income ratios in qualifying
for a home loan, this could be an important consideration. It may affect whether
you choose to cash out the account and pay any tax penalty, or simply borrow against
it.
Employers
Some companies provide down payment assistance for their employees. They may feel
that Homeowners are more stable and reliable employees, or that providing down payment
assistance fosters an environment of higher morale and loyalty to the firm. Just
make copies of all the paperwork, including a copy of the check and the receipt
when you deposit the funds into your personal bank account. It is important that
these funds do not require repayment.
Savings Bonds
If you have Savings Bonds, they are a financial asset, too. Since you hold the actual
bonds in your possession, the easiest and best way to verify them for your mortgage
lender is to make photocopies of them. If you choose to cash them in for down payment
or closing costs, you should do this at your local bank. Be sure to keep copies
of the paperwork the bank provides because that will establish the current value
of the bonds and show that you received their cash value.
Personal Property - Cars, Antiques, etc.
Personal property includes automobiles, vehicles, boats, furniture, collections,
heirlooms, antiques, art, clothing, and practically everything you own except for
real estate. The mortgage application asks you to estimate the value for these items.
The larger the loan amount, the more important it is for you to provide details
on your personal property. This is because larger loans usually indicate larger
incomes, and lenders check to see if your personal property matches your income.
If it does not, this sends a "red flag" to the underwriter and they take a closer
look at your application.
You are not required to document the value of personal property unless you intend
to sell them to come up with your down payment.
Selling Personal Property
For those Homebuyers who do sell personal property in order to come up with their
down payment, the verification process can be arduous. Lenders are much stricter
about documenting this method of coming up with your source of funds.
Selling a car is perhaps the easiest to document. First, you need to photocopy the
registration that shows you actually own the vehicle. You will have to provide a
copy of the page in the "Blue Book" that shows your model and its value. Then you
need to photocopy the bill of sale showing the transfer to another individual and
a copy of the check used to purchase the vehicle. Do not get paid in cash because
that makes it impossible to show you actually received the funds. Make a copy of
the receipt when you deposit the funds into the bank.
Other types of personal property are more difficult because you have to show that
you actually own the property and that it actually has the value that you sold it
for. This is a little harder to do for most assets than it is for automobiles.
If you have records to show you purchased the property, that would be helpful. You
could also provide an old inventory that documents ownership. To determine value,
you may have to contract with an independent appraiser or a specialist who has the
knowledge for that particular type of property.
If you cannot document the item's value, the lender will not view the sale as an
acceptable source of funds. Just like selling a car, you have to prove you own the
item, make a copy of the bill of sale, copy the check used to purchase the item,
and make a copy of your receipt when you deposit the funds into your bank.
