Lenders want to know that people have invested their own into the house, making it less likely that they will walk away from their life’s savings. They analyze savings documents to insure the applicant did not borrow the funds.
In addition to down payments, many lenders want to make sure that borrowers have funds in “reserve” after move in. This makes the consumer less of a risk factor since they have demonstrated that they have money to pay for moving expenses and other associated costs of home ownership, while being able to carry a mortgage payment.
ALL funds that are disclosed on the borrower’s personal bank statements MUST BE “SEANSONED” for a minimum of 60 days. ALL large deposits or transfer of funds that appear on the borrower’s bank statements, with the exception of the borrower’s direct deposited earnings, monthly income, social security, pension, etc., that are in excess of 40% of the already documented gross earnings MUST BE “DOCUMENTED” to prove the large deposit’s source of origin.
Lenders evaluate savings for three reasons.
- The more money a borrower has after closing, the greater the probability of on-time payments.
- Most loan programs require a 5% minimum borrower contribution.
- Lenders want to know that people have invested their own into the house, making it less likely that they will walk away from their life’s savings. They analyze savings documents to insure the applicant did not borrow the funds or receive a gift.
Lender look at the following types of accounts for source of funds:
- Checking and Savings
60 days seasoning in a bank account is required for these funds.
- Gifts Funds
After a borrower’s minimum contribution, a gifts or grant is permitted.
– Owner occupied and 2nd home is allowed for purchase and refinance transactions.
– Gift donor must be blood or legal relative, domestic partner, or fiancé.
– Gift letter must contain the amount of the gift, donor’s name, address, phone number and relationship.
– The donor should state that repayment is not expected.
– When LTV/CLTV <= 80%, the entire down payment may come from a gift.
– Donor’s the most recent month bank statement and paper trails of transfer of funds are required.
- Sale of Assets
Personal property can be sold for the required contribution. The property should be appraised and a bill of sale is required. Also, a copy of the received check and a deposit slip are needed.
- Secured Loans
A loan secured by property is also an acceptable source of closing funds.
- IRA, 401K, Keogh & SEP
Any amount that can be accessed is an acceptable source of funds.
- Sweat Equity and Cash On Hand
Generally not acceptable
- Sale of Previous Home
Must close prior to new home for the funds to be used. A lender will ask for a listing contract, sales contract, or HUD 1 closing statement.
- Business Accounts
If the borrower is self-employed as a Sole Proprietor, which means the borrower is filing a “Schedule C Profit or Loss from Business” along with IRS Form 1040, the borrower may submit their business accounts as proof of assets to be used for Funds to Close but not for cash reserves. However, you will need a signed letter from the borrower’s accountant stating: “Any withdraw from this business account will not have any adverse effect on the borrower’s business”.
If the business accounts are in a Corporation or LLC name, they may be acceptable under certain loan programs if the borrower(s) on the loan application is/are 100% owner(s) of the corporation or LLC. This also will need to be documented with a signed statement from the borrower’s accountant.