mortgage down payment Archives - Non-Qualified Loan

Your Own Savings

If the down payment money comes from your own savings, the lender will require the last 3 months’ of bank statements. On these statements, they will look for irregular and large deposits. If there are regular deposits that occur on a consistent basis, they will not question it.

But, say for example you sold your motorcycle and put the money in your savings account. That’s not a regular deposit and it’s likely a large deposit. The lender will need to know where that money came from. If you have any large deposits similar in nature, you’ll need to provide a paper trail showing where the money originated.

In the example of the sold motorcycle, you can show the deed of sale and the check from the buyer. You can also keep your deposit ticket showing the deposit so that it matches the amount of the check from the motorcycle buyer. Any transaction you conduct should have a paper trail.

If you don’t have a paper trail, the lender will assume the money is a loan. They will then include a monthly payment amount in your debt ratio. This can affect your loan approval. It’s to your advantage to keep as much paperwork as possible for proof.

Stocks and Bonds

Liquid investments can serve as a valuable down payment tool as well. Just like your savings account, the lender will need the last 3 months’ of statements. They will determine the value of your account to ensure that it meets the amount you need to put down on the home.

However, you will also need to show the lender the proof of the sale of the asset once you sell it. You’ll provide the lender with the paperwork you receive for the sale. You’ll also need to prove that you transferred the funds into your account. Keep the deposit ticket from the transaction and provide it to the lender alongside your proof of the asset’s sale.

401K

In extreme cases, you may borrow from your 401K. This isn’t a recommended method because it depletes your retirement funds. Even though you’ll pay the money back, you lose the time value of the compounded interest you would have received.

If you go this route, you’ll need your latest 401K statement. You’ll also need proof that you are eligible for a 401K loan. You’ll need your employer’s approval along with proof of the required payments. Some lenders may count the payment against your debt ratio. It varies by lender. Even though you are paying yourself back and you don’t owe interest, it’s still a debt. Lenders give you a specific timeframe to pay the debt back. This is the same as if you took out a loan from a bank, so the lender will likely count it.

Gift Funds

Many loan programs, including FHA and conventional loans allow gift funds for the down payment. You must follow a specific procedure in order to have the funds count.

The donor must provide you with a gift letter. The letter should be signed and dated by the borrower. It should state the amount of money they are gifting. It should also state the reason (home purchase) along with the address of the home. Finally, it should state that this is a gift and not a loan. This is the most important statement to the lender. Again, if it’s a loan, it could count against your debt ratio.

You’ll also need to provide the lender with proof of receipt of the funds. Some lenders also require proof of where the donor received the funds. They may ask for the last 3 months’ worth of banks statements from the donor. The lender will look for any large deposits that throw up a red flag. They’ll also need proof of the funds transfer. You can do this with a canceled check from the borrower and the deposit ticket into your account.

Verifying the down payment isn’t difficult, but it does require a paper trail. Lenders are on the lookout for any red flags that make them think the money is a loan. Even if it is a loan, it doesn’t always mean you’ll lose your mortgage approval. If it fits within your debt ratio, you may still have an approval.

Be honest with your lender about the source of your down payment funds. Ask what proof they will need to source the funds and what timeframe they must cover. Some lenders require more than 3 months’ of bank statements just to make sure the money wasn’t stuffed in your account just to make it look like you had more money.

No matter the case, keep a good paper trail and you’ll get your down payment verified in no time.

You are ready to take the plunge and buy a home. You’ve heard the minimum deposit allowed is 20%. What if you don’t have that? Are you stuck renting for the rest of your life? Luckily, the answer is no. there are many factors that play a role in this answer, though.

We’ll explore each of these below.

No Deposit Required

Wouldn’t it be nice if you could find a loan program with no deposit required? Luckily, you can. The USDA and VA both offer programs with no down payment. In order to qualify, you’ll have to buy a rural property if using the USDA program. The VA program is reserved for those that served our country. If you fall into either category, you’ll enjoy the superior benefits of these programs.

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The USDA program has flexible guidelines along with the no down payment requirement. In fact, the program is for borrowers with low to moderate income. You can make too much money and not qualify for the program. You can see the USDA’s income guidelines here. Aside from the income requirements, you must also purchase a home within the USDA’s rural boundaries. You can view the eligible properties here.

Veterans also have the benefit of a no down payment program. In order to qualify, you must serve the appropriate time:

90 days during wartime
181 days during peacetime
6 years in the National Guard or Reserves

If you meet the eligibility requirements, you’ll receive a Certificate of Entitlement. This gives you the right to buy a home with no down payment. Just like any other loan, though, you’ll need to qualify personally. For the VA loan, you’ll need a 620 credit score and a debt ratio no higher than 43%. The property must also pass the VA appraisal requirements.

Low Deposit Required

If you don’t qualify for one of the above no down payment loans, you have other options. Low deposit loans are the next best option. The most common is the FHA loan with a 3.5% down payment requirement. This loan doesn’t have maximum income or service requirements. It’s not just for first-time homebuyers either. As long as you meet the credit and income requirements, you may be eligible for the loan.

In order to be eligible, you’ll need at least a 580 credit score. You’ll also need a debt ratio that doesn’t exceed 31% on the front end and 43% on the back end. Lenders will also look for a decent credit history with no collections or other negative credit events in the recent past.

Some borrowers also qualify for a low down payment conventional loan. The down payment is slightly higher than the FHA loan, though. Conventional loans usually require a 5% down payment. In order to qualify, though, you’ll need exceptional credit and low debt ratios. Conventional loans generally have stricter requirements than FHA loans. However, they become even more restrictive with a low down payment.

Whether you take out an FHA or conventional loan with a low down payment, you’ll need to pay some type of mortgage insurance.

The FHA loan requires 0.85% annual mortgage insurance for the life of the loan. On a $200,000 loan, this means $142 per month or $1,700 per year. Your lender pays the insurance on your behalf on an annual basis. They then charge you 1/12^th of the amount per month. The amount you pay decreases slightly each year as you pay the principal balance down. FHA MIP never expires. You pay it for the entire time you hold the loan, no matter your loan-to-value ratio.

Conventional loans also require mortgage insurance, but it’s different than the FHA loan. The amount you pay depends on your loan-to-value ratio and term of the loan. The longer you borrow the money, the higher percentage you pay. The difference between PMI and FHA MIP is that PMI can be canceled. By law, the lender must cancel it once you owe 78% of the value of your property. You can also request cancellation if you know your home appreciated or you paid the principal down enough.

Do You Ever Need 20% Down?

It might seem like you can get away with a low deposit with the large variety of loans available. Not everyone qualifies for these programs, though. In general, you need fairly good credit for these programs. The exception to the rule is the VA and USDA loans, but only certain people qualify for those programs.

Borrowers that don’t fall within these parameters may need a larger down payment. Conventional loans, as well as subprime loans, may be available, but for a higher down payment. Just how much you must put down depends on the lender and your parameters. Generally, the lower your credit score, the higher the required down payment. Your credit score helps lenders predict your level of financial responsibility. A low credit score equals a high risk in the eyes of the lender. If a lender approves you for a loan, it will usually be for a higher down payment.

The more money you have in the home, the more likely you are to make your payments. Lenders look at it like “skin in the game.” For example, if you invested $5,000 in a home, you might not fight hard to keep the home. But, if you had $20,000 invested, you may work much harder to make ends meet. This is why lenders often require higher down payments for risky loans.

If you want to lower the amount you deposit on a home, make your qualifying factors as attractive as possible. Fix your credit so that your score increases. Keep your debt ratio down and have liquid assets on hand. This way you prove to the lender that you are responsible and have money available should your income stop suddenly.

There are plenty of low down payment options. Shop around with different lenders to find the program that suits your needs the best!

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Do Mortgage Lenders Verify Down Payment Sources?