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Documenting Your
Assets - Verifying Your Down Payment
When buying a home, it is not enough
to just "come up" with the money. With the exception of "no asset
verification" loans, lenders want to verify where the money comes from. If
you can document the funds comes from your personal savings, the lender is
more confident of your strength as a borrower.
In addition, if you
can verify you have additional assets that are not needed for the down
payment, it is important to document those, too. Additional assets are
"reserves" you can draw upon during times of trouble, such as
unemployment, medical emergencies, and similar occurrences. Additional
assets can also help to document that you have a history of saving money,
which makes you a more dependable borrower.
It is extremely
important to completely document the paper trail of any funds you use for
down payment and closing costs. The sections below provide guidance on
both verifying assets and documenting them as a source of your down
payment.
Checking, Savings, & Money Market Accounts
The quickest and easiest way to document funds in your bank
account is to provide your lender with copies of your most recent bank
statements. Most lenders request two months bank statements, but some
still ask for three. Some lenders still send a "Verification of Deposit"
to your bank in order to determine your current bank balances and average
balance for the last two months. However, that is the old way of doing
business and most lenders nowadays prefer to have bank statements.
If the money you are using for the down payment and closing costs
has been in the bank for the entire period covered by the bank statements,
you're fine. These are known as "seasoned funds." However, if your
statements show any large or unusual deposits the lender will ask you to
explain them and document their source.
Stocks, Bonds, Mutual
Funds, etc.
Most of those who own stocks get a monthly or
quarterly statement from their brokerage. You will need to supply
statements for the most recent sixty or ninety days in order to document
these assets.
Though it is rare nowadays, some people actually
have stock certificates instead of having a brokerage account. When this
is the situation, make copies of the certificates and provide those copies
to your lender. You might also want to supply tax records to indicate you
have owned these stocks for some time.
If part of your down
payment will come from the sale of stocks and investments, you will need
to keep all documentation that applies to the sale. Provide these copies
to your lender as well.
Gifts
Especially when
buying a first home, some borrowers need help coming up with the down
payment. This help should come in the form of a gift from a close family
member. Lenders will require the donors to sign a special form called a
"gift letter." The gift letter states the relationship between the
parties, the address of the purchased property, the amount of the gift,
and sometimes the source of the funds used to make the gift. The gift
letter also clearly states that the funds are a gift and not required to
be repaid.
With most lenders, the donor will have to also provide
evidence that they have the ability to make the gift. This can be in the
form of a bank or stock statement to show they have the funds available.
You should also make a copy of the check used to make the gift and keep a
copy of the deposit receipt when you deposit the gift funds into your bank
account or escrow.
401K or Retirement Accounts
It
is important to provide documentation about your retirement accounts or
401K programs because this is another asset you could draw upon as
reserves in case of a problem. It is also another way to show you have a
savings history. Just provide a copy of your most recent statement to your
lender.
Many people use these accounts as a source of funds for
their down payment, too. Some employers allow you to "cash out" a portion
of the 401K and some allow you to borrow against it. Be sure to keep
copies of all paperwork involving the transaction. If they cut you a
check, be sure to make a photocopy of that, too, including any receipt for
deposit into your personal bank account.
If you are borrowing
against your 401K, some lenders will count this as an additional debt to
go along with car payments, credit cards and other obligations. This may
seem kind of silly because you are borrowing your own money, but from the
lender's viewpoint it is still a monthly obligation that you must come up
with and should be taken into account. If you are "tight" on your
debt-to-income ratios in qualifying for a home loan, this could be an
important consideration. It may affect whether you choose to cash out the
account and pay any tax penalty, or simply borrow against it.
Employers
Some companies provide down payment
assistance for their employees. They may feel that homeowners are more
stable and reliable employees, or that providing down payment assistance
fosters an environment of higher morale and loyalty to the firm. Just make
copies of all the paperwork, including a copy of the check and the receipt
when you deposit the funds into your personal bank account. It is
important that these funds do not require repayment.
Savings
Bonds
If you have Savings Bonds, they are a financial asset,
too. Since you hold the actual bonds in your possession, the easiest and
best way to verify them for your mortgage lender is to make photocopies of
them. If you choose to cash them in for down payment or closing costs, you
should do this at your local bank. Be sure to keep copies of the paperwork
the bank provides because that will establish the current value of the
bonds and show that you received their cash value.
Personal
Property - Cars, Antiques, etc.
Personal property includes
automobiles, vehicles, boats, furniture, collections, heirlooms, antiques,
art, clothing, and practically everything you own except for real estate.
The mortgage application asks you to estimate the value for these items.
The larger the loan amount, the more important it is for you to
provide details on your personal property. This is because larger loans
usually indicate larger incomes, and lenders check to see if your personal
property matches your income. If it does not, this sends a "red flag" to
the underwriter and they take a closer look at your application.
You are not required to document the value of personal property
unless you intend to sell them to come up with your down payment.
Selling Personal Property
For those homebuyers who
do sell personal property in order to come up with their down payment, the
verification process can be arduous. Lenders are much stricter about
documenting this method of coming up with your source of funds.
Selling a car is perhaps the easiest to document. First, you need
to photocopy the registration that shows you actually own the vehicle. You
will have to provide a copy of the page in the "Blue Book" that shows your
model and its value. Then you need to photocopy the bill of sale showing
the transfer to another individual and a copy of the check used to
purchase the vehicle. Do not get paid in cash because that makes it
impossible to show you actually received the funds. Make a copy of the
receipt when you deposit the funds into the bank.
Other types of
personal property are more difficult because you have to show that you
actually own the property and that it actually has the value that you sold
it for. This is a little harder to do for most assets than it is for
automobiles.
If you have records to show you purchased the
property, that would be helpful. You could also provide an old inventory
that documents ownership. To determine value, you may have to contract
with an independent appraiser or a specialist who has the knowledge for
that particular type of property.
If you cannot document the
item's value, the lender will not view the sale as an acceptable source of
funds. Just like selling a car, you have to prove you own the item, make a
copy of the bill of sale, copy the check used to purchase the item, and
make a copy of your receipt when you deposit the funds into your bank.
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