It's no secret you need cash on hand to get a mortgage, but you may not know that the way you handle that cash as you apply for a loan can seriously derail your homeownership chances.
Keeping your money in one place is vital to a mortgage transaction. Cash to close and savings after closing escrow are critically important to sealing the deal. Here is what you need to know if you've been moving money around and are applying for a mortgage.
It's an Issue for Banks
Moving money around in different accounts may raise concerns for suspicious activity with mortgage lenders. Lenders these days must be able to document the paper of funds on each and every loan made. While 99.9% of mortgage borrowers are simply moving money from one bank account to another for various convenience reasons, they're creating a red flag for lenders when the origin of the funds cannot be substantiated.
When you move money around, the lender has to document each account the money passes through. Let's use an example. You have a standard checking account that does not contain significant assets, but it's used for your monthly accounting of bills and expenses. If you moved the money for your down payment into your checking account from your savings account while continuing to pay bills, it could appear to the mortgage lender like you are spending part of your down payment, creating a cash to close roadblock. A better solution? Keep the money in the same place. Transfer the money when needed, sending it directly to escrow on your loan transaction, simplifying the paper trail.
Create a Paper Trail
To best avoid lending condition surrounding money movement, be prepared to show the full statements of the monies leaving each account. It is customary within mortgage lending to provide two months of statements for each account needed for cash to close escrow and/or for savings required after-the-fact as a safety cushion. This paper trail must appear to the naked eye that the money begins in one account, goes to another, and ends up at close of escrow. As long as the paper trails is clear and conspicuous, the lender should have no concerns with these monies so long as the funds can be supported. The same goes for gift funds. Gift monies will also need a clear paper trail. The same requirements that come into play may be needed for that safety cushion, depending on your loan program.
Here's a quick guide to typical requirements for "safety net" funds your lender may require:
- Conventional Loans: Two months of mortgage payments needed in the bank in most cases if you're financing a primary home. You'll need six months of mortgage payments for investment homes for all properties owned.
- FHA Loans: No reserve requirement
- VA Loans: No reserve requirement
- Jumbo Loan: Requirements vary by lender, but you will generally need at least six months of mortgage payments in assets after closing escrow.
The bottom line: If you plan to use a bank statement that shows a history of money movement, including money transfers and other various accounts and/or additional monies being deposited independent of your income, you're going to have some homework to do.
Just because you have a paper trail doesn't mean you're home free yet. If you have a joint bank account or have cash outside of your normal income that's entering your account, you have a few more steps to satisfy lenders. Here are the details.
Joint Bank Accounts
If you've been moving money in and out of a joint bank account with another party who is not a party to the mortgage transaction, the lender is going to request a letter from this other individual stating you have 100% access to those funds.
Placing cash deposits in your bank account independent of your normal income can be problematic for getting a mortgage. Since these deposits can't easily be traced to their origin, it may raise some suspicious activity concerns even though they can be legitimate deposits from other income sources like freelancing gigs or side jobs.
Lenders want to see at least two months of mortgage statements without cash deposits and without large movements of money. Otherwise, expect these transfers and deposits to be identified, questioned and documented. While these requirements can seem like a nuisance to the average homebuyer,it's a byproduct of the quality of loans being made in the market today. By fully documenting everything and leaving no stone unturned, lenders can do their due diligence in further substantiating a mortgage borrower's ability to qualify. As such, these credit requirements help ensure there is little risk to buying a home or taking on a mortgage you cannot afford. (Here's a calculator to help you figure out that home affordability number.)
In addition to income and a paper trail for your homebuying funds, make sure your credit score is in good shape before you head to your lender to get pre-approved or apply for a mortgage,. You can get your free annual credit reports at AnnualCreditReport.com under federal law. And you can see your credit scores for free every month on Credit.com.
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