Mortgage Calculators and Down Payment Documentation

Mortgage calculators are very useful tools for determining the qualifying income and the down payment necessary to obtain a new home loan.  Even after the mortgage calculator has indicated the amount of down payment that may be necessary to qualify for a mortgage, the loan approval process is far from over.  Once a potential home loan borrower determines the appropriate income levels and down payment amounts needed to obtain the home loan, documenting or supporting these numbers is a crucial step in the home loan approval process.

An important operation that the mortgage lender or bank will go engage in the mortgage loan application process is to verify the sources of the applicants down payment.  The mortgage lender will verify other financial needs as well such as, funds for closing costs and reserves and document the borrower’s income and debts.  One of the biggest barriers to getting the mortgage loan approval, especially for first time home buyers, is raising a sufficient amount of money for the down payment and closing costs.  The lender will go through several procedures to determine the borrower has the funds to qualify as a borrower.
 
Generally, the mortgage calculator will accomplish the primary job of determining the appropriate amount of the down payment, documenting the source of these funds will be up to the mortgage lender.  The most important rule regarding funds to close is that the down payment must come from the borrower’s savings or in certain mortgage transactions such as FHA mortgages, a gift from a relative.  This is verified by obtaining the financial statements of the home loan applicant regarding the deposits of where the funds for the down payment are held.  Part of the application process will involve financial documents being submitted to the mortgage lender to verify these assets that are to be used for the down payment. 

Financial statements that are requested or submitted to support the source of down payment funds may include; bank checking or savings account statements, mutual funds, stocks, IRA or 401(K) brokerage account statements, documents from the proceeds from the sale of another property, statements reflecting the cash value of life insurance, statements regarding the Gift from an immediate relative.

The process does not end with the simple knowledge of the source of the down payment.  The mortgage lender will verify these sources are the borrowers, have come from the borrower and are available for use as funds for the down payment and closing costs for the home loan transaction.  These requirements at first glance seem redundant; however there is a rational for the apparent redundancy.  The lender will generally request two or three months of the financial statement that support where the money is, for example; two months of the checking account statements or two months of the brokerage account statements or in the case of funds form the sale of another property, the HUD-1 settlement statement and a copy of the check from the proceeds.  The reason for the multiple statements is to make sure the mortgage loan applicant did not borrower the money and deposit it in their account the month before the mortgage loan request.  Determining that the funds are in fact the borrowers by checking the length of time the funds have been held is sometimes referred to as seasoning the funds.  This is the mortgage industry’s manner of measuring how long the borrower has had control of the funds.  Red flags for the mortgage lender or bank are large deposits in the bank account or sudden unexplained increase in the balances.

Furthermore, if the funds for the down payment and closing are tied up in assets such as certificates of deposit or stock and mutual funds, these funds must be verified as liquid prior to closing.  Liquid funds are those funds that are similar to cash such as checking, savings or money market account.  This means that the stocks will have to be sold and placed in a money market account or checking account and in the case of certificates of deposit; the CD will have to be cashed in.  Technically, a stocks value can go up or down and the stock itself can not be used as the down payment and therefore any funds that are to be used for a down payment must be converted to liquid funds and verified as such prior to the mortgage loan closing.

The mortgage calculators are terrific starting point to determine the amount of money needed for the down payment on a new home.  The value of using the mortgage calculator to run numerous scenarios on different home prices, loan amounts, assorted loan programs and the down payment requirements for each can not be under estimated.  The important footnote is that all of the figures the mortgage calculator produces will have to be supported and verified.  In order to make the mortgage loan approval process move swiftly it would be wise to take extra care to document the sources for any monies to be used for the down payment or closing costs.

Tags: down payment, loan, mortgage, mortgage calculator

This entry was posted on Monday, February 16th, 2009 at 9:05 am and is filed under Mortgage Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.