This article was written by our featured, lending partner, SunnyHill Financial
Have you ever attempted to obtain a mortgage loan for the purchase of a home and wondered why your lender cares so much about the source of your down payment? An applicant recently said to me, “It’s my money, it shouldn’t matter to you!”
FICO is king! In today’s mortgage market, your FICO score and loan-to-value are the main factors that determine your rate and price for a Conforming loan, which is a home loan that meets Fannie Mae & Freddie Mac guidelines and has a loan amount of up to $453,100 (or up to $679,650 in certain high cost areas of the U.S.). Contrary to popular belief, having extra money in the bank or a low debt-to-income ratio have NO impact on the rate or pricing for a Conforming loan. These are however, compensating factors that can help you qualify for a riskier loan (e.g., investment/rental property, cash-out refinance, high loan-to-value, etc.).
That applicant’s sentiment is not alone…
One of the most frustrating aspects for homebuyers during the mortgage process continues to be the documentation of assets for loan approval. With a little preparation, however, this part of the loan approval process can be simplified.
Home purchase loan applicants must show the source(s) of their down payment to the lender by providing their complete bank or financial account statement for the most recent one, or two months in some cases. ALL pages of the statement(s) are required showing at least a 30-day transactional history of the account. Most applicants don’t realize, however, that providing a copy of their bank or financial statement is often just the beginning of the asset documentation process because the majority of applicants do not have their entire down payment funds already parked in one account.
After providing a copy of ALL bank or financial account statements you plan to use for your down payment, your mortgage professional will need to know your plan for bringing the funds to close. When using multiple sources (bank/financial accounts or gift funds) for your down payment, is it best to consolidate all funds to one account or provide separate cashier’s checks or wire transfers from each bank account? In regards to the asset documentation required for final loan approval, there’s a pro and con to each plan.
OPTION 1: Consolidate all down payment funds to 1 bank account
PRO: You will only have to initiate 1 wire transfer or obtain 1 cashier’s check to the title or settlement company.
CON: You will be required to show the paper trail of funds transferred to/from each account by providing the transaction history covering the period from the ending date of your most recent monthly statement provided through the date showing the deposit or withdrawal.
OPTION 2: Do not transfer funds between bank accounts
PRO: Less asset documentation required because you will not need to show a paper trail of funds being transferred to/from accounts.
CON: Must initiate multiple wire transfers or obtain multiple cashier’s checks to the title or settlement company.
Some homeowners wait to liquidate investments or consolidate their down payment funds because winning a bid on a home can be so unpredictable, and dependent on many external factors (e.g., limited property inventory, pending sale of existing home, seller accepting the offer, etc.) Regardless of whether you choose to consolidate your funds or not, any time you use a non-liquid financial asset for the down payment (e.g. CD, stock, mutual fund, 401K loan, IRA withdrawal), you will also be required to show proof of liquidation of that asset via a transaction history covering the period from the ending date of your most recent monthly statement provided through the date showing the liquidation. Why, you might ask?
Lenders must ensure that your down payment will be coming from the stated account(s) and that you are not borrowing funds. For the same reason, lenders require that you document the source for any large deposits. Borrowed funds would be considered a liability and that monthly payment must be included in the calculation of your debt-to-income ratio. This could cause your loan to be denied if your debt-to-income ratio exceeds the lender’s maximum limit.
In summary, whenever possible try to avoid moving money between accounts or making large deposits to minimize the asset documentation you will have to provide for final loan approval, or if you do have transfers or deposits, ensure you have proper paper trails and explanations to provide to your lender. This will result in less documentation required and a smoother loan process.
Additional account holders on bank account. Young applicants, especially first-time home buyers, often have their parents name(s) or another relative still listed as a co-account holder on their bank statement. When other individuals not applying for a loan are listed as an account holder on the bank statement, the use of those assets for your down payment is considered to be “pooled funds” in the eyes of the lender. “Pooled funds” require additional documentation to be allowed as a source for your down payment, or may not be allowed if certain requirements cannot be met. To ensure a smoother loan process, before applying for a loan consider removing co-account holders on your bank statement if you no longer have any need to keep them on your bank account.
Different mailing address on bank statement. If the mailing address shown on your bank statement is different from your current residence address, be prepared to have to provide an explanation for the difference. The rationale behind this request is to make sure the applicant is living in the stated current residence. Consider updating your mailing address to your current residence address to avoid additional documentation requirements. (PO Box mailing addresses are acceptable).
Do not over-document your assets. Only provide the bank statement(s) for the accounts being used for your down payment and to satisfy any asset reserve requirements needed for loan approval. Your mortgage professional will advise if any asset reserve requirement is needed.
Proceeds from a sale of a home. If the purchase of your new home is contingent upon the sale of your existing home, it’s best to have your sale proceeds wired directly from the title company handling your sale to the title company handling your purchase. If your sales proceeds are deposited into your bank account, you will be required to provide an updated bank transaction history showing the deposit.
You may think that providing every financial asset statement you own will help your chances in getting your loan approved, and sometimes it will when it is needed as a compensating factor for failing to meet a loan guideline. However, if you have already documented your down payment source(s) & any asset reserve requirement, it can actually cause you more headache. More paperwork always means more chances for the underwriter to question something about your additional asset documentation (e.g., still using an old mailing address, missing pages, large deposits, etc.). A good loan processor will sift through your financials and only include what is needed to qualify but don’t put the fate of your loan experience in the hands of the lender by over documenting assets.
Lastly, while we’re on the topic of assets…some applicants think, “I have more than enough assets, why do I need to show more information to satisfy additional asset conditions, or other miscellaneous conditions on my loan file?”
According to state & federal regulations, it is considered to be a form of predatory lending when a lender provides mortgage financing strictly based on the assets of the borrower, rather than on the borrower’s ability to repay the loan (“asset-based lending”). Lenders must complete an “ability to repay” analysis to ensure the borrower has sufficient income to afford the loan payment.