Saturday, February 6, 2016

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.

Monday, February 1, 2016

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.