If you start the mortgage application process and find out that you don't quite have the required funds, these five ways to get money in the bank may help you get that mortgage sooner than later.
1. Looking the gift horse in the mouth
Monetary gifts can typically be used to fund down payments, closing costs, or required financial reserves. There have been big changes in how lenders treat gift funds, however. In order to be counted by the lender, a gift generally has to come from a relative or a friend who is like family (and you will have to write something that explains how this friend is like family).
This may seem like an invasion of privacy, but sadly, it's a byproduct of the "straw buyer" fraud schemes of the housing boom. Here's how the scheme went: Say you wanted to purchase an investment property with a minimum down payment, but you already owned a primary residence. Because investment properties usually require a bigger down payment, you found someone to buy the house who didn't already have one, and you offered to give them the money for the down payment to buy it as if they were going to live in it. This meant the difference between putting 20% down and putting 3.5% down. When rapid price increases stalled and values began to plummet, these properties defaulted in massive waves.
Anyone giving a gift will also have to show where there money came from. This means your grandma will have to overcome her aversion to providing private information to a third party and give the lender a bank statement showing that the money she is gifting you is already in the bank. This shows the lender that cash wasn't given to grandma by someone else and in turn gifted to you -- another rule borne of the unethical practices of the housing boom.
2. Mattress money
You netted about $3,000 from the cash dance at your wedding, and you have it all locked up in a safe, ready to use for the down payment on your house. There's a pretty good chance this money won't be usable. Guidelines vary by lender, but most don't like to see money suddenly pop up in the bank without any verifiable source. Lenders are always worried about whether somebody else is trying to get you to buy a house. Explaining where the money came from, and perhaps even providing a copy of the wedding license and a few respectable pictures from the reception, will help firm up the case for using this money to qualify.
3. Borrowing against an asset or selling an asset
If you have a free and clear car, or a gold coin collection that's been sitting in a safe collecting dust, you can borrow against it or sell it and use the funds toward the funds you'll need for closing. Before you put that car up for sale or call up your coin collecting buddy, you'll need the following:
- Proof that you own the asset. For a car, a copy of the title showing it's in your name will work. The coin collection will require some form of proof that you own it, so these types of assets can be a little more difficult to use.
- Proof of the value of the asset. For the car, a blue book will do. For the coin collection, use whatever third-party valuation is applicable in the coin collecting world.
- A bill of sale or the loan papers showing how much you were able get by borrowing against that asset. The bill of sale should identify the buyer. If the buyer is a relative with the same last name, you may have some trouble proving this isn't a gift or temporary loan.
- Transfer of title to the new party and proof of the funds you received going into your bank account. Don't forget to keep every single document related to this sale, all the way down to the deposit receipt of the funds you get once the car or coin collection is sold. Also, if you do get a loan, make sure you check with your mortgage professional to make sure you qualify with the new payment.
4. Down payment assistance
Googling "down payment assistance" and the name of your city or town will bring up options that are available from local nonprofits and housing agencies. Retail banks often offer special closing-cost grants and have access to special down-payment assistance programs, so make sure you ask your mortgage professional about these programs. This money sometimes comes with special requirements that you will have to pay back the money if you sell the house within a certain time, so be sure to read the small print and ask your mortgage professional any questions you may have.
5. Budgeted savings
It is still possible to provide documentation of budgeted savings to buy a house. You'll need to create some sort of spreadsheet of how much you spend and how much you're saving each month, along with copies of deposit receipts and bank statements showing the money building up. When in doubt, write it down, keep copies of everything, and make sure you can explain exactly how you budgeted the money.
Final Foolish points
"Skin in the game" is an expression you're likely to hear at some point as you research the money needed to buy anything in the real-estate world. In the minds of lenders, the less money, or "skin," you have to buy a property, the more likely you are to default. Don't try to game the system, either. Lenders have CSI-style forensic auditing processes to track the validity of all the types of money. If you can't get a mortgage by building funds using one or a combination of the options outlined here, it may be better to put off that loan application for a little while.