Home purchases often require much more more explaining and
documenting than buyers realize. Here are five things mortgage
lenders need to know about the money in your bank accounts, as
well as how it got there, before they'll hand money over to
1. How long has your money been in the bank?
If your money has been the bank for at least 60 days without much
change in the balance, you'll be able to use the money for down
payment of closing costs pretty easily. This is called
"seasoning," and it's the recipe for the easiest approval of your
money in the bank.
2. Can you explain those big deposits?
So you got an unexpected bonus, and Uncle Louie finally paid back
the two grand he lost on the horse race a few months back. These
large, one-time deposits will need to be explained and
documented. If Louie paid you back in cash, you probably won't be
able to use that money toward a down payment. Keep in mind that
direct deposits of your paycheck and tax refunds don't have to be
explained so long as it's obvious where they came from.
Large deposits into accounts are probably the biggest source
of stress for most customers during the loan process. If you have
a lot of cash deposits going in and out of your accounts and plan
to get a loan in the next 60 to 90 days, consider opening a "new
house" account so that you can keep a big chunk of money in there
and keep the balance fairly constant for the next couple of
months. You'll need a full two months' worth of statements so
make sure you plan and time things accordingly.
3. Retirement accounts
If you have funds tied up in retirement savings accounts, only
$0.60 of every dollar will count for the purposes of qualifying.
The reason is simple: The lender is considering the value of
those accounts in the case that you have to liquidate them to pay
your bills. You would be subject to early withdrawal penalties,
as well as potential fluctuations in value based on market
conditions. The consensus among lenders is that a 40% reduction
in the accounts' value makes sense when using that asset to
qualify for a mortgage.
4. 401(k) loans
Using the borrowing power of your 401(k) can be a relatively
cheap way to get access to the money you need for the down
payment and closing costs on a new purchase. One drawback is that
the loan payment will be applied as a reduction in your income,
as the payment is deducted from your paycheck and you'll
therefore have a little less qualifying income for the new
The other drawback is that not only will that money no longer
be working for you in the market, but the value of the asset will
be reduced by how much you borrow. This can create a problem if
you are buying investment property, as the guidelines require
that you have six months of monthly payments in the bank for
every investment property you own.
For example, let's say you have $50,000 in a 401k and you
borrow $25,000 against it. You have $25,000 left, but because a
401(k) is a retirement account, you'll get as little as 60% of
value toward your reserve requirement, or $15,000.
If you own two other investment properties with $1,000/month
payments each, not only will you need to have $6,000 for each
property, but you'll need $6,000 on the new property you buy --
for a total of $18,000. Since you only have access to $15,000
worth of asset value in your 401(k), you're short on the reserve
requirement, and the lender won't make that loan.
Be sure to check your reserve situation with a mortgage
professional before you take out that 401(k) loan.
5. The whole bank statement and nothing but the whole
There was a time not long ago when you could hand over the first
couple of pages of your bank statement and lenders were fine with
it. Not anymore. If you have a 14-page statement -- even if seven
pages of the statement are small-print legal disclosures or
general information -- you need to provide every single page.
Don't bother asking for an exception: It won't be granted. If
you don't want to provide or don't need a particular asset to
qualify, then just tell your mortgage professional you don't want
it used for qualifying.
Final Foolish thoughts
In general, if you've been in the habit of saving for a while,
these are the safest and easiest ways to verify money in the bank
for a mortgage. Guidelines vary by lender, and exceptions are
sometimes made, but in the hyper-regulated home loan financing
world we live in, you will find that the more you stray outside
these five options, the more documentation and explanation hoops
you will have to jump through.
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5 Things Mortgage Lenders Need to Know About Your
originally appeared on Fool.com.
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