Loan Mortgage Process
In the 1980s, there was this video game called “Pitfall.” To beat the game, you had to traverse various levels while avoiding the big black holes that would lead to your character’s demise. The more you played it, the more you got used to the challenges. You could plan ahead.
The mortgage process is the same way. It’s easier to avoid the pitfalls if you know what to expect. You can have a game plan to avoid them.
I spoke with Quicken Loans Senior Purchase Banker Patrick O’Connor about the most common challenges clients face and how a little preparedness can help you avoid missteps.
Normally when we get a gift, we’re not supposed to consciously keep track of its value. That’s not the point. We’re taught to just let friends and family do something nice for us.
With a down payment gift, you absolutely need to document everything.
“A lot of times people are getting gift funds to purchase a home, ” O’Connor said. “Maybe they’re not initially looking to do that, but a family member finds out they’re buying a home and wants to help out. We have to show a paper trail for all the money that’s gone into their account for the last 60 days.”
You can’t bring recently deposited cash to the closing table. It can sometimes complicate things because the cash used for close has to be documented and in your account for a period of time. If it isn’t, you may not be able to use those funds to finish the loan process.
Avoiding a Sour Gift
The gift letter should include, among other things, the amount of money being gifted and who or where it’s coming from, as well as a statement that the funds don’t have to be paid back.
On an FHA loan, lenders also need to see bank statements from the donor showing that they had the funds in their account for at least 30 days prior to the gift.
What do you do if you suddenly come into some money – maybe from your birthday or the holidays – that you would otherwise put toward your down payment, but can’t document on short notice?
O’Connor recommends you spend this money by taking a page out of Destiny’s Child’s book and start paying those “bills, bills, bills.”
While this can be a helpful guideline, you also don’t want to pay off something like your car or student loans in full with that money before closing. Funds used for the purpose of fully paying off accounts have to be documented.
“Avoid cash deposits that are around $400 or $500 or even a series that adds up to that, ” he said. “Spend saved up cash on bills so you can have sourced paychecks build up in your account.”
Another common issue O’Connor said people run into is when they sell assets in order to quickly boost the funds available for a down payment. If it’s your stuff, what’s the problem?
First, you can’t sell that pool table your wife wants you to get rid of for cash. The transfer has to be somehow documentable in the form of a check or other transfer medium that leaves a paper trail.
The second and perhaps more sticky issue is that you have to be able to document that what you’re selling was indeed yours to sell. Otherwise, the lender has to treat it like a loan, which can’t be used for a down payment.
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