Down Payment And Closing Costs
The down payment for a home purchase is probably the most biggest challenges most first time home buyers face once they decide to become homeowners. Many potential first time home buyers’s main concern is how much down payment do I need and how much closing costs will I need to come up with. Home buyers do not need to worry too much about closing costs because there are two ways of not having to come out of pocket for closing costs and prepaids.
Solutions To Cover Closing Costs: Sellers Concessions
The first way of covering closing costs is to ask for a sellers concession towards the buyers closing costs and prepaids. This can easily be done by inflating the purchase price by the closing cost and prepaids amount. Conventional mortgage loans allow up to 3% in sellers concessions and FHA loans allow up to 6% sellers concessions towards a buyers closing costs and prepaids.
Lenders Credit To Cover Closing Costs
The second way of covering closing costs is by lenders credit towards closing costs. A lender can cover most of your closing costs in the event if you do not get a sellers concessions by giving you a higher mortgage rate in lieu of giving you a lenders credit towards closing costs and prepaids.
Unfortunately, sellers concessions cannot be used towards the down payment.
Down Payment For Home Purchase
Mortgage lenders will only accept sourced down payment funding towards the down payment of the borrowers new home. Cash or mattress money are not allowed as sources for down payment. All down payment funds must be sourced and verified. Listed below are acceptable down payment sources to be used towards a residential home purchase.
1. Borrowers and co-borrowers checking accounts and saving accounts are acceptable sources – A two months, 60 days, of the most recent bank statements, may be used to verify savings and checking accounts information. Any large deposits over $200 dollars needs to be sourced.
2. Cash at hand or in safe deposit box – Cash resources are non existent in the mortgage business. Under certain circumstances, cash at hand may be used if the mortgage loan borrower can write a detailed letter of explanation on how the cash was accumulated over what period of time and providing supporting documentation like bills of sale or receipts. This is extremely difficult to be accepted by the mortgage loan underwriter but the mortgage loan borrower can try.
3. IRAs, Retirement accounts such as IRA’s, 401K’s, and pension accounts – Mortgage lenders will allow up to a 60% value of retirement accounts such as IRA’s and 401k accounts to be used as liquidable assets in underwriting a residential mortgage loan. A mortgage loan borrower is allowed to secure a loan against their retirement accounts. The right hand rule is that a mortgage loan borrower can borrower the lesser of 50% of their retirement account or $50,000. In general, you can borrow the lesser of $50,000 or one-half of your retirement plan balance.
4. Securities accounts such as common stocks and bonds – The lender may use the most recent monthly or quarterly statement provided by the stockbroker or financial institution managing the portfolio to verify the value of stocks and bonds. The borrower’s actual receipt of funds must be verified and documented.
5. Bonds and government bonds – Mortgage lenders will allow government bonds such as municipal bonds at par price or the price that the investor has purchased the bond.
6. Gift funds from a relative is allowed for FHA loans as a source for down payments – Gift funds are allowed for FHA loans as long as there is a gift letter signed by the donor that he or she does not expect any of the gift money back from the person receiving the gift or repayment plan. The person giving the gift needs to be the following people:
- a person who is related to you by blood or marriage.
- Your current employer or a labor union the mortgage loan borrower belongs to.
- a charitable institution like a church or a non for profit organization.
- a local, county, state or federal governmental institution that has an implemented home buyers program that assists first time home buyers aid or assistant towards their down payment such as providing aid to low to moderate income families or single parents.
7. Liquidation of personal property as long as bill of sale is provided is allowed for down payment sourcing – A mortgage loan borrower is allowed to sell personal property and use those funds as a down payment source as long as the bill of sale and copy of the cancelled check is provided to the mortgage loan underwriter. The following are allowed:
- Automobiles and motorcycles as well a boats.
- recreational vehicles and trailers.
- Gold, silver, and coins
8 . Proceeds from real estate sales – The proceeds from a real estate sale or transaction is allowed as long as the mortgage loan borrower can provide an executed HUD from the sale and bank statements showing the deposit into their accounts.
9. Collateralized funds are allowed – Funds that are collaterized by a secured asset is allowed as long as you can provide the contract and agreement.
10. Employer can assist with your mortgage costs – Your current employer can help you in the following:
- Paying all or part of your closing costs and prepaids
- MIP or PMI
- Part of all of your original down payment.