In a recent post, I talked about how an underwriter looks at a borrower’s credit history, income and job history to determine how much of a mortgage they can qualify for. The other big part of qualifying for a mortgage is showing how much skin you have in the game, that is how much are you investing in the home, and where the money is coming from. We need to make sure you have enough money for your down payment and closing costs, and in some cases, money in reserve. Again, this all goes back to the idea of risk. Not so long ago it was common to buy a home with no money down. But that was before the real estate market turned down. Conventional lenders have now eliminated 0 down financing and you will, in most cases, need to have at least 5% of the purchase price for a down payment. You still can buy a home with little or no money down, but you have to plan ahead and it won’t work in all situations.

Why does the lender want you to have your own money invested in the property you’re buying? There are a few reasons. First, if you have your own money at stake, you’re more likely to take care of the property and make sure you make your payments on time. An investment in your home strengthens your commitment. Mortgage insurance and 2^nd mortgages allow you to buy with lower down payments while taking some of the risk off the lender. How ever much you are putting down, we need to verify it, know where it’s coming from and be able to prove that you have enough to close.

In order to check for assets, we need to know where the money you need to close (down payment and closing costs) is coming from. Here are some acceptable sources for a down payment:

• Money on deposit in the your checking, savings, money market, certificate of deposit or any other liquid account.
• Money from liquidation of stocks or bonds.
• The proceeds from the sale of a house or other assets (an extra car, a boat or having a garage sale).
• A loan against your current home or other secured asset.
• A liquidation or loan against your 401K or IRA.
• A gift from a relative or a grant from an agency (like AmeriDream or Nehemiah) that doesn’t have to be repaid.
• Cash value from a life insurance policy.

If you are using money from a bank or other cash account, we will need to verify that the money in the account is really yours. We will look at the statements for the last 2 months. If there are any large deposits (not counting your normal payroll checks) we need to show proof with a paper trail of where the money came from. As you can see, there are lots of ways to raise the money for your down payment – here is a bigger list. Where it can’t come form is an unsecured loan (no credit cards). Again, the lender wants to make sure you have skin in the game, and borrowing more money doesn’t cut it.

To make the loan approval process as smooth as possible, it’s important to know where your down payment money is coming from. It’s best not to transfer money from account to account, if possible, but if you have to, make sure you keep records so we can trace the flow of funds. If you have any questions about your down payment, and whether it will be acceptable, discuss it with your loan officer before you are ready to make an offer, to make sure you can structure it correctly and this won’t be a problem later.

Gifts for your down payment – Gifts are a special case, and if you are expecting that some of your money will be from a gift, a little planning ahead of time will make your experience much easier. First of all, gifts aren’t allowed on every program. With some conventional programs, unless you are putting at least 20% down, 5% of the down payment needs to be from your own funds – all the rest can come from a gift. With FHA loans all your cash can come from gift, or a grant from a non-profit agency.

Gifts also have to be documented in a particular way. We have to be able to show that this truly is a gift, not a loan. To show this, we use what is called a gift letter. This is a form that is filled out by you and the person giving the gift. It states how much the gift will be, what your relationship is to the person (it has to be a family member of some kind), and that this is a gift and won’t need to be repaid.

The next step is we need to prove that the donor (the person giving the gift) has enough money to give the gift. For this we will need an account statement or a letter from the donor’s institution stating that they have the funds available. The last step is that we need to show the transfer of funds from their account to yours. The easiest way to prove this is for them to give you a certified check showing them as the donor and you as the payee. Make a copy of the check and show the deposit into your account, and we’re done. If they give you the gift as a personal check, you will need to allow extra time because then we’ll have to see the canceled check. This whole process is clumsy and redundant, but following each step will make things much smoother in the long run.

One other note, this letter and the documentation are only used for approving the loan. None of the information will be shared with the IRS, or any other government agency.

Your credit, income and assets are what we look at when approving you for a mortgage. The other part of the approval is approving the property. I’ll have more on appraisals in a future post.

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