One of the biggest questions when buying a home is how much money do I need? It will depend on your down payment and closing costs. For many, you may only need 3-5% for a down payment (unless you want to put more down). Plus you will need money for your closing costs – I usually tell clients to figure roughly 3% (more for smaller mortgages, less for larger mortgages) – that includes your closing costs and prepaids (prepaids are interest, insurance and taxes, including setting up your escrow account).
The issue isn't always the money – but where does the money come from. Underwriting will require that we document where all the money came from for closing. In some cases it is very easy – it comes out of your checking or savings account. Maybe it's coming from the sale of your current home. Maybe it's a gift. How do we document this? It depends!
If you are selling your home, we will get a net sheet from your realtor that gives us an estimate of what you should get when you close on the sale of your home. Then we verify that at closing (or right before) with the actual numbers. As long as you are getting the same or more than we estimated, you are good! If it's less, we may have to adjust numbers and that may delay your closing.
For those getting gift money, we need to get a gift letter and document the transfer of the gift. The documenation depends on whether you are using a conventional or FHA mortgage. FHA requires us to document that the person giving the gift had the funds to give you the gift.
One issue that happens frequently is paying off debt to qualify -that works as long as we can show that you have the money to pay off the debt. Maybe you paid off a credit card during the processing of your loan, that's great – we need to document it. We need bank statement that shows the account was paid off.
Does your bank statement have cash deposits on it? If so, we are going to have an issue – typically it means backing out that deposit. That can affect how much money you have for closing. Do you have deposits that may be hard to verify? Keep copies of the checks you deposit so you can provide them to the underwriter. We need to document a 60 day history (typically 2 months of bank statements). Look and see if you have any large deposits – if so, we have to document where those funds came from. I just had a client that received money from an inheritance, I needed to get a copy of the will showing she was getting that money. If you are self employed and deposit money into your account, keep copies of the deposits and the checks you are depositing -that way you can easily provide the documentation an underwriter will want.
Money for closing tends to be one of the biggest underwriting issues – we need to show where it came from to make sure there is not another loan that could affect your ability to make the mortgage payments, or that there is not fraud involved in the transaction. We need to be able to show that the money did not come from the seller or anyone else involved in the transaction. It seems painful for many homebuyers, but due to past issues, it is important! If you can document the deposits, it's easy!