Without a doubt, the hardest and most misunderstood part of getting a mortgage these days is the evaluation of funds used to purchase a new home. For some people, just saving up for a down payment is the hard part; for others, it’s justifying from where the money came.
It can be a real problem, and the root of the problem was caused by the housing collapse of 2007-2008 when interested parties were contributing money toward the cause of buyers or sellers to complete the transaction and turn a profit.
As a result of these past practices, bank statements have become highly scrutinized. Any deposits that are not a part of regular income have become questionable. Underwriters must know where large deposits come from with supporting documentation. That also means transfers between accounts must be included in the underwriting package in order to get accepted.
A lot of honest and responsible people make saving money a part of their regular deposits from their paychecks in order to get the money together to make the big purchase.
These days, underwriters don’t trust anyone and must follow guidelines to the letter, which means that every allotment made from a paycheck to a bank account is also questioned. What kind of account is it? What is the money going toward? Is a bill being paid from that account that isn’t on the credit report? Is a child support payment being made?
These are just a few things that are possible. That doesn’t mean that they are happening, but due diligence must be done to make sure the facts are apparent. Today’s buyers are usually surprised by the amount of documentation and statements required to get a mortgage approved, and the primary reason is to prevent another housing collapse by any means necessary.
Gifts funds are often given by close friends or family members in order to help someone buy a house. That is all well and good, but again documentation is required. Usually a copy of the donor’s bank statement, a copy of the check and the deposit of the funds must all match.
The issue occurs when the donors don’t want to give their bank statements. This reluctance can ruin a purchase because the funds need to be from the donor, and a 30-day statement must be provided to prove the source of the money. Again, underwriters don’t trust anyone and can’t simply take the donors at their word.
Sometimes buyers make an early withdrawal from their retirement accounts to buy with those funds. The withdrawal is one of the easier things to document because it’s usually just a retirement statement, a deposit check and the deposit itself made into a bank account. Those three items are needed to prove the money’s source.
Buyers need to know these things going on, so they can prepare for what’s to come. Part of the preapproval process includes educating buyers about these things, so they have an idea of upcoming events when they have a ratified contract. That way there aren’t any surprises when it comes time to get the mortgage approved, and the process is smoother for everyone.
Some people say it’s ridiculous that so much must be given to buy a home. I would argue that it’s better to be safe than have another housing collapse.
Jason Turner is a mortgage consultant who blogs at mypreferredlender.net.