Low Down Payment Mortgage

Preparing a Buyer for their First Open House

Before meeting with a Realtor, it is very important to have buyers pre-approved for a mortgage. A pre-approval will identify your buyer's price range, uncover any potential weaknesses, discover any special Grants they may qualify for and clarify which mortgages options are in their best interest.  Each mortgage product varies from the amount of money needed down to the acceptable debt-to-income ratios and it is important to know these factors upfront.   

What is a Pre-Approval ?

A mortgage pre-approval is a written commitment identifying the mortgage amount you qualify for.  Part of the mortgage pre-approval process is to obtain  bank statements, tax returns for the past two years, calculate annual income, and pull a credit report to confirm you meet the Lender’s credit criteria.

When Should I Get Pre-Approved For A Mortgage?

The answer to when you should get pre-approved for mortgage is simple.  Complete this before you contact a Realtor and begin looking at houses. Below are a few key reasons you will be glad you obtained a pre-approval before looking at houses.

Correct inaccuracies on your Credit Report

Did you know there are over 50 credit score models and they are all different? Don’t rely on the credit score you received from a credit card company, department store or even from a recent car purchase. The most common problem we encounter when we pull a credit report is the consumer has no knowledge of a particular item or the payments or amounts owed are reported incorrectly.  Each lender has minimum credit score requirements for every one of their loan products.  So many activities impact your credit score and while you are looking for houses with a Realtor we can help you improve your credit score by fixing any errors or inaccuracies.  It can sometimes take a couple of months for it to get corrected on your report and for your score to be readjusted.  This can happen seamlessly at the same time you are shopping for your home.

 Eliminate Disappointment

Most Realtors will require a pre-approval before even showing you potential properties, but unfortunately some real estate agents will show you houses with no clue whether you can afford a home or not. Top Realtors will strongly agree this is a disservice to you. Why is this a disservice?  The fact of the matter is, you could  “fall in love” with a home, submit a purchase offer, and find out once they speak with a mortgage lender you cannot finance that home due to credit problems or because of other reasons. Being in this situation can understandably leave a buyer upset, heartbroken, and disappointed.  Moreover, you could even lose the Deposit you made on the sales contract!  We work with many professional, reputable Realtors and will gladly introduce you on request.

Understand All Of The Costs To Buying A Home

There are substantial closing costs when buying a home.  It’s not as simple as a 3% to 30% down payment. By getting a pre-approval, you will have a very strong understanding what costs to expect when buying a home.

A Mortgage Professional will help you identify the following:

• Total Loan Amount you qualify for
• Closing Costs and how to get the Seller to pay your Closing Costs!
• Where to find Free Grant Money for the Downpayment
• How to properly document a gift for the Downpayment
• How much you personally need to save

How to Deposit and Document a Downpayment Gift

First time home buyers often receive assistance when buying their first home.  Whether it is hand-me-down sofa from an aunt, help with landscaping and weeding, or even a hand moving, everyone wants to pitch in to make sure a young couple can get their dream home.

A common gift from parents to children is cash assistance with the downpayment.   Parents know if they can assist with getting 20% of downpayment, their children will save on mortgage insurance and interest.  Over the life of a loan, it is truly a gift that keeps giving.   In other situations, even having 3.5% down will help a couple qualify for a home.   Gifts are common, but often given incorrectly.

Before accepting a gift, make sure it will meet the mortgage guidelines.  I know at first, it might seem ungrateful to only accept a gift in a certain form, but it is truly necessary in this case.   Follow the steps below to make sure you gift will be allowed by the Lender:

1. Use a check.  Lenders like to trace back the funds and if you use a money order, it creates an extra step for the generous donor.  No need to create unnecessary stress.
2. Be sure to deposit in person.   Yes, it is easier to snap a picture with your IPhone, but you will need to produce a front and back picture of the check.   The images included with the monthly statements makes this easy for the borrower.   Seeing “image not available” with mobile or ATM deposits become a bigger challenge.
3. Do not co-mingle funds.  When you make this deposit, do not throw in a rebate check, birthday money, ect. on the same deposit slip   You want it to be easy to find this amount and have it match perfectly.
4. Choose the right account to make the deposit.   If you make a deposit to the same account you plan on writing the check for the downpayment, you only have to produce one bank statement.  It is so easy to see the gift deposit and earnest money (downpayment) coming from the same bank statement.   Lenders will appreciate it and so will your printer.   Why make more work if you do not have to?

If you really want to stay ahead of the game or your parent live a few hours away, be sure to get a gift letter signed along with your check.  The Lender WILL ask for this during the process.   A signed and dated letter should state the amount of the gift, the subject property address, the relationship with the buyer, and the fact it was a gift, not a loan.

Why do we have these guidelines?   Lenders want to make sure that a gift is just that – a gift and not a loan from your parents or a cash advance from a credit card.   Lenders are determining whether you are able to pay a mortgage based on your current debt and income.  If you cannot account for the funds being a gift, then it just becomes debt you have to pay back and will factor into their decision whether you can “afford” the mortgage you are applying for.   Just make sure you deposit and document your  downpayment gift properly and it will be a smooth transaction.

Check, Please! Sourcing Money for a Mortgage

It appears in the brave new world of mortgage lending, paper checks have all but disappeared.  They have been relegated to the land of shredded paper or electronic storage.  Banks no longer even keep paper copies.   Great news for the trees, however, this is often bad news for borrowers. When making a large purchase, it is important to keep the associated paperwork in order to meet the lender’s documentation requirements.   We are all aware of that fact since we filed our first tax form.   What makes mortgages different is that not only the paperwork counts, but the “source” as well.

Over the last few months, I have had more and more buyers use money order to pay their earnest money deposit when entering into agreement to purchase a home.   That decision just created another step (or three!) in the loan process.   So, realtor and buyers make sure you save yourselves some time and effort. Please use CHECKS, not money orders.

Borrowers must “source” money orders.  What that means is the Lender not only needs a copy of the original money order and the realtor verifying the deposit, but now they also need a bank statement (or statements!) to show where they withdrew the cash for the money order. Perhaps the buyer withdrew it over three months as a “savings plan”, which means they have to produce three more months of bank statements where the withdrawals match the earnest money amount exactly.

Lenders want to make sure these funds used for the money order are not a gift towards down payment or a cash advance from a credit card.    The gift process creates a different set of paperwork that I will talk about in a separate blog.  So, my advice to buyers and real estate agents:  Please use paper checks and be sure to keep copies to make your loan process smoother.  It will create a better transaction for all.