Let’s start with how much you need, which will depend on the program you’re doing and the loan amount.  In general, on an FHA loan, you need 3.5% of the sale price for down payment and approximately another 4% of the sale price for closing costs.  This number may seem high, but closing costs make up a lot of different things — lender charges associated with originating your loan, appraisal, credit report, funds to start your escrow account, 1-year upfront homeowner’s insurance, title company charges, county charges and possibly a broker commission fee charged by your Realtor.

Your down payment can come from logical sources like your own money, a gift from a family member or even down payment assistance available to some first time buyers.  Money for closing costs can come from these sources too, plus in most cases, the seller can pay for some or all of your costs, depending on the program.  They cannot cover any of your down payment.

Let’s say you’ll be using your own money — which is very commendable.  Lenders will require the last 60 days of bank statements to prove you have the funds necessary for closing and down payment.  Funds can come from many different account types – savings, checking, money market, roth IRA, stocks, bonds, mutual funds, 401K accounts and possibly more.

The big thing to know is that CASH on hand or deposited is NOT acceptable in a mortgage transaction.  Cash cannot be verified or traced, so it’s unacceptable as an asset.  Any deposits made into your bank accounts on the statements you provide for your loan, and those going forward, will be scrutinized in terms of deposits and overdrafts.  It’s important to only deposit your work income while in the mortgage process.  Check out the other things NOT to do in the process.

Taking a loan against an asset is also acceptable for down payment, though the payment, in most cases, will have to be used as a debt in qualifying.  Loans against another home, car or your retirement are typical places you could finance the costs or down payment.  An unsecured loan or draw against a credit card is NOT acceptable.

Assets are important, but not crucial at the time of pre-approval.  For instance, some of my borrowers save during the process.  Though they may not have the funds at our first meeting, they will within a month or so prior to closing.  As I mentioned, gifts are acceptable sources of assets too as long as they are from a family member.  There is a method to the madness for verifying these assets, so please seek advice from your loan officer PRIOR to getting any funds from family.

The take-away from this is that you will need money for down payment and closing costs; however, the amount you need will vary on the program and if you’re eligible for special assistance and/or if the seller agrees to assist with costs.  The other big take away — DON’T make deposits that aren’t from your employment or they will be questioned.  It’s better to be above-board with your loan officer about your intentions rather than finding out at the last minute you have an issue with your loan due to unverifiable assets.

Your pre-approval puzzle is solved now that you have all four things in place.  The glue that will hold it all together is choosing the right loan officer who will help you make sure the pieces are where they need to be.  Of course, it would be my pleasure to serve as your glue, but with anything, you need to find a person you trust and are comfortable with.  Good luck!!!

*You must be a Veteran to qualify for a VA loan.  Zero-down is par for the program, but there are still closing costs that either need to be paid by the Veteran, a gift from family or the seller.

Being pre-approved means a couple of things.  First, you’ve applied for a loan – which can be done via the phone, in person or mycompany  website which is the option many take.  Our online application is a secure site which will only take you about 5-10 minutes, depending on how long it takes you to type!!   A one-on-one meeting is not necessary at this time, BUT, I do suggest we meet PRIOR to you looking at homes.  There is a lot to learn about the process, the money you need to purchase a home and the different loan programs and first time buyer programs you could qualify for.  I would be doing you a huge disservice if we didn’t take the time to meet.  Generally, my meetings take 1-2 hours.  I try so hard to keep them manageable for you, but it’s my goal that you leave the appointment with a full understanding of what happens next.  And, you feel like ALL of your questions have been answered.

The second piece to a pre-approval is pulling your credit report.  The credit report is important for a few reasons.  First, regardless of whether you are buying your first home or fifth, you must have at least a 620 credit score.  Though it is true that loans insured by FHA (Federal Housing Administration) and VA (Veteran’s Administration) do not have minimum score requirements, it just doesn’t matter.  FHA and VA are not buying or servicing the loan — the end investor is.  THEY are the ones requiring the 620 score.  And, there are some investors that require a 640 score.  This part of the pre-approval puzzle has become crucial to qualifying for financing.  It didn’t used to be this cut and dry.

The third part is submitting your loan to an automated underwriting system or to an underwriter.  In order to confirm your pre-approval, it’s important that I collect documentation to support the information you provided on the loan application.  The following documents will be required from you to complete this process:

-most recent paystub

-last 2 years W2s AND last 2 years federal taxes (it’s the last THREE if you’re applying for a first time buyer program)

-most recent MONTH bank statement, all pages, all accounts

-copy of your driver’s license (this is part of the Patriot Act that came about due to 9/11)

-any court papers, such as bankruptcy, divorce or child support

Because everyone has a different situation, there may be more documents requested.  For instance, let’s say you had a $3000 deposit into your account from the sale of a car.  Your “extra” paperwork would include a copy of the title, cashier’s check you got for the sale and a copy of the blue book value to substantiate the value matches what you sold the car for.  Now you may be asking why this is any of our business, and truthfully, I would do the same thing too.  All lenders want to source the funds you receive.  If you have deposits other then income, then lenders want to know where the money came from — if it’s a loan, then we need verification of that and need to count payments in our debts.  If it’s a gift, then we need to document that according to the specific program you’re doing.  This can be a lot of back tracking which is why during our appointment, I will advise you what NOT to do while in the home-buying process.  It’s better to know what you need to get to verify deposits then having to re-create documentation that may not even exist.

One of the main reasons this is the FIRST STEP in the process is two-fold — first, it insures that you can get financing and two, you will know what price range you can look at, as well as what payment you’re comfortable with.  Sellers will require that you’re pre-approved.  And just so you know, all pre-approval letters are NOT created equal.  Just because a lender says you’re approved doesn’t mean this is true.  Some lenders don’t take the step of verifying the information provided.  Some don’t understand the rules of the first time buyer programs or don’t know the ins and outs of the loan type you’ve applied for.  The paper the letter is written on is sometimes worth more than the actual “pre-approval”.  More times than I can count, I was presented with a pre-approval letter from another company via the Realtors I work with.  Low and behold, they were coming to me to “save” the deal because indeed, the person was NOT pre-approved.  So, how can you tell?  I guess the only suggestion I have is to work with a reputable company, one that’s known for your special needs (i.e. first time buyer programs).  Listen to your agent’s advice.  Even then, they aren’t always connected to the right people.

Woohoo — you’re pre-approved.  Now what?  It’s time to get excited because the fun begins — you get to look at houses and find one that fits your needs, as well as your budget.  Speaking of budget.  This is a VERY important thing to keep in mind.  A lender can tell you your max payment is $1500, but in your heart and on paper, you know going over $1200 would put you in the poor house.  Staying withing your comfort zone is key to having a great home -buying experience.  I don’t plan to make your house payment so you would be wise to have a number in your head for that “max” payment you’re willing to exceed.  When you do put some numbers down as a budget, don’t forget things like insurance, meals out, entertainment, clothing, etc.  Many people forget these things — hey, even a coffee each day adds up!  Another note … being pre-approved with take a lot of disappointment away from the process.  If you start looking at houses you THINK you can afford and then come to find you don’t fall in that price range; you will be frustrated and bummed.  Believe me; I’ve seen it.  It’s better to know what your range is before you start looking — either on your own or with an agent.

So, take the first step to your home buying experience by getting pre-approved.  It’s the one piece of this home buying puzzle that will help all the other pieces fall into place.

Let’s start with the biggest offender — deposits into your bank accounts.  While in the process, please don’t make any deposits other than your regular payroll deposits.  And, please resist the urge to transfer money back and forth between accounts.  So go ahead, ask the question … why is it any of our business what you do in your accounts, right?  I respect that question, but of course, have a valid response.  The thing is, FHA, VA and Conventional guidelines all require that we “source” the funds for down payment.  If there are deposits, we need to verify you didn’t take a loan out (and if so, we need to know the terms of the loan to consider the payment as a debt) or make sure it wasn’t a gift.  The loan type you’re doing needs to allow for gifts and we would need to document the gift and donor.

What else are we going to restrict you from?  Another biggie — please don’t mess with your credit.  For example, don’t start closing unused accounts.  History makes up about 15% of your credit score and if they go away, you will reduce your history.  This is super important for first time buyers since they might not have a long history to begin with.  A few other things — obviously, don’t open any new accounts, pay off any collections (unless your lender told you to do this) or pay off debts.  New accounts mean you’ve had inquiries into your credit.  These can negatively affect your score.  I advise clients NOT to pay collections.  Main reason is tracking, and for the most part, only VA guidelines require collections to be paid.  I would rather you pay it off at closing.  This way we have a paper trail of payment vs. assuming you’ll get a receipt from the collection agency.  Good luck with that!  Oh, and the reason I keep mentioning scores is that they are crucial to whether you can get financing or not.  These days, you must have a 620 score or higher to get a loan.  I have a perfect example of a current client who had a score of 622.  We were golden; but her price range limited what was available to look at.  Finally, five months later, she’s ready to go and I had to pull new credit (reports are good for 120 days).  Due to her increasing her debt-load with balances over 50% of the available credit limit, her score dropped to 618.  UGH!  There is seriously nothing we can do but wait.  On her end, she can use some of the down payment money she was saving to pay down these cards to less than that 50% mark.  Since she had no lates or other derogatory things, this is the only reason her scores decreased.  The moral of the story … don’t mess with credit, which can even mean, don’t increase your balances on revolving lines such as credit cards.

As much as a new job is really cool, make sure you’ve consulted with your lender prior to this change.  We just ask that you don’t change your pay structure or how you’re compensated.  Let’s say you’re currently salaried and you have a great opportunity to earn more by changing how you’re paid (which is usually more a benefit to the employer in the beginning).  So now, you make a base salary, lower than what you were previously making,  but have a whole lot more potential top make more by receiving commissions.  This may be true, but you may have just unknowingly sabotaged your ability to get a loan.  Why?  Well, all loan types require you have a 2-year history of commissions; otherwise, we can’t use the income for qualifying.   This is true with bonus, self-employment, tips and overtime — all need a 2-year history.  So don’t go from being employed to starting your own business either.  This will hinder your financing plans big time.

The next one seems super obvious … well, I think so.  Don’t make any large purchases such as a new car, furniture or appliances.  This covers a few of the areas above.  For instance, if you’re offered a no-payment option for 2 years on appliances, you may say “sweet” and go for it.  Couple things happen here — your credit is checked, so an inquiry is made which may bring your score down.  Also, even though you don’t have payments, we still have to count a payment on this new debt.  This could make it so you can’t buy the home you have a purchase agreement on.   That would not be good, for all parties involved, you especially!

Last is my rule … don’t ever feel like you can’t ask a question.  There is never a right or perfect question, as well as a dumb question.  I have an “open question” policy.  My hope is I can assist you with your loan, and during the loan process, make sure I’m answering your questions before you even have them.

There you have it; a few things that you shouldn’t do while in the loan process.  Believe me, following these “rules” will make the process so much smoother.  It’s easier to paper trail prior to an event happening vs. having to chase papers since it’s already done.  Just say “no” to the above so we can say yes to your loan approval.

Here’s the answer to those questions above.  It’s a check you write that is presented with your offer to show the seller you’re “earnest” in buying their home.  The amount can vary from $500 and up, the most common amount being $1000 or $1500.  You DO need to have this money in your account.  Once your purchase agreement is accepted and all contingencies have been cleared – i.e. inspection on the home passes and you plan to move forward — the check is cashed.  Here is the crucial thing.  If you’re doing a first time buyer program that requires you to have some of your own funds into the transaction, this money CAN be applied as such.  This means that the money does need to be yours, not a gift and not a deposit from somewhere else that can’t be traced.  The earnest money IS part of your down payment.  It will come off the bottom line at closing for the funds you need assuming we, the lender, can prove it cleared your bank account.

Can you get it back if you bail?  Ha, good question.  If you choose not to buy due to an unacceptable inspection, then yes, you can.  If you cannot secure financing, more often than not, this would also qualify to get it back.  If you don’t perform in a timely manner on the purchase agreement, back out or otherwise, I wouldn’t count on getting it back.  Plus, the seller could sue for damages — like time off the market.  Working with a knowledgeable Realtor will help you understand the ins and outs of getting it back if necessary.

There you have it — earnest money.  When going out to look at homes, don’t leave home without it — your checkbook, that is!  You never know when you will come upon the house you want to make an offer on.

• gifts can only come from family members
• gifts CAN cover all of your down payment and closing costs, unless the program requires a minimum investment, like the Dakota County Bond Program
• don’t deposit gift money into your accounts until you’ve discussed this with your loan officer
• the funds for the gifts WILL be tracked — not only into your account, but proof will be requested from your family to prove they had the money to give you (there are specific guidelines to follow)
• cash is not an acceptable gift
• if demonstrated, gifts could come from a non-family member, i.e. fiance or partner (certain documentation will be required)
• unsecured, borrowed funds are not acceptable sources of gifts

These are a few things that come to mind when advising on gifts.  Maybe you’re asking why even address this?  Here’s the thing, in the 16 years I’ve done this, I’ve seen way too many times when a loan file gets hampered by doing the wrong thing with gift money.  It’s my goal to give you the best advice possible so this doesn’t happen to you.  It’s already a stressful situation buying your first home, it certainly doesn’t need to be worsened by having to create a paper-trail for something that already happened.  Better to know what is expected of you on the FRONT end of your home-buying process then coming to you and your family at the end asking for more paperwork.  Oh how fun!

Moral of this tip — please be upfront with your intentions to get a gift and hopefully you will be given the right advice the first time!