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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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