By Libby Christoules, Flyhomes Mortgage
Saving money for a down payment on a home is a big accomplishment. Now it’s time to verify your funding and get pre-underwritten for a mortgage loan.
You lender wants to see that the money you’re using for your down payment is rightfully yours and that spending it won’t impact your ability to repay the loan.
When qualifying for a mortgage, different types of funds have different set of rules.
Savings or checking accounts
A bank account is usually the easiest type of funding to verify.
IRA and 401(k) retirement accounts
To use funds from your 401(k) account, an underwriter will need to see evidence of liquidation.
Liquidation in this case means funds from the account have either been withdrawn or borrowed against the balance, and deposited into your bank account.
An IRA has no restrictions against liquidation prior to retirement. However, 401(k) plans can be restricted, so the underwriter will want to see documents permitting you to use those funds.
You can sell your stocks to use the funds for your home purchase.
If the value of your investment account (before selling) is at least 20% more than the amount needed for your down payment and closing costs, you’re not required to provide a receipt of the stock sale.
Otherwise, the underwriter will ask to see the paper trail of the stocks being sold and the funds being deposited into your bank account.
In order to use bonds, an underwriter will need to see the bank printout detailing the bond numbers and values cashed in, as well as the deposit into your checking or savings account.
You can use borrowed funds only if they’re proceeds from a secured loan.
The most common example is using proceeds from a second mortgage or a home equity line of credit on a property you already own.
Unsecured loans, such as personal loans or advances from a credit card, are never allowed to be used towards your down payment or closing costs.
If you’re self-employed, you can generally use your business account towards your down payment if you are the 100% owner of the business.
If you own less than 100% of the business, your lender may ask for additional documentation from your bank or accountant to show you have the right to withdraw the business funds.
Gift funds can be an excellent source to help finance your home purchase.
The gift can come only from a relative or employer (the company, not your coworker) and a letter stating that the funds are not repayable is required.
Note: some loan programs, such as jumbo loans, may require that at least 5% of your down payment come from your own money before you use gift funds.
The donor gifting the funds to you also has requirements.
For an FHA loan, an underwriter will need to see the donor’s most recent bank statement in order to verify they were financially able to provide the funds to you.
For conventional loans, a copy of the cleared check or wire receipt provides that verification.
Because cash cannot be sourced, no mortgage lender will allow you to use it for your down payment or closing costs.
Remember that even if you deposit large sums of cash into a checking or savings account first, the underwriter will still want an explanation and documentation … which isn’t possible with cash.
You may use foreign assets to finance your home purchase, but the currency exchange into USD on the day of transfer is required.
You may also be asked to have documentation supporting the transfer translated into English by a professional translator.
Sale of personal assets
If you sell personal assets, a copy of the sales receipt and a copy of the check or money order received is required.
Keep in mind it’s best not to accept any payment in cash if you want to use the funds for your home purchase.
If you’re selling a vehicle, you may also be required to provide a copy of the title transfer and a value estimate from a commonly used valuation source to prove you sold the vehicle for a reasonable price.
If the vehicle had a lien associated with it, the underwriter will want assurance that your primary goal wasn’t just to eliminate a debt to qualify for your loan.
Each mortgage lender is unique, so documentation across companies may vary. The tips listed above outline general requirements that we have found common across the industry.
Be sure to double check with your mortgage lender to get the specific requirements for your situation.
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