Cover Your Assets — The Last Pre-Approval Puzzle Piece
Monday, October 17th, 2011Who knew you needed money to buy a home? It’s a crazy thought, but it’s true. Now … there are programs that can help you with a portion of the required down payment and closing costs. Or, if you’re a Veteran, you may be eligible for a loan with nothing down.* Because not all people are Vets or qualify for these first time programs, you need to know how much is required for down payment and closing costs. Plus, it’s helpful to know what lenders are looking for in terms of documentation to prove you have the funds to cover these necessary loan requirements.
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.








