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 you.
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 loan.
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 bank statement
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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