Borrowing money for a down payment to buy a home is an absolute ‘no-no’ in the world of mortgage lending.
If there is a chance you may not have enough for the down payment plus closing costs, we can sometimes ask the seller to help cover closing costs. Or you can even accept a gift from a close relative to help with the down payment and closing costs. But borrowing for the down payment or closing cost money is totally forbidden!
Once the loan process begins, document, document, document
I’ve had several buyers over the years who have run into problems, not because they didn’t have enough money or great credit, but because they couldn’t prove a recent deposit to their account wasn’t borrowed. And if a buyer can’t document the source of a bank deposit, the loan underwriters will always assume he made a private loan.
In one case, my client was a policeman. Like so many policemen, he had worked a ‘detail’ during Mardi Gras. But when he deposited the check from the merchant, he didn’t think to make a copy of it. Wouldn’t you know, when they looked at his bank statement, the underwriters assumed he had made a loan… and he couldn’t prove otherwise. It became such an issue, that in order to close on his house, my policeman had to get a ‘gift letter’ from his sister for the amount of the deposit. And of course, she also had to produce a copy of her bank statements to prove she had the funds and hadn’t gone out and borrowed money on her brother’s behalf.
Another buyer simply deposited cash from a garage sale. Since they were downsizing, they started cleaning out in preparation for their upcoming move. She emptied the attic of all the baby furniture (crib, stroller, and tons of baby stuff), along with furniture they didn’t want to move to their new home. Seems natural enough – but how do you document the source of cash to a lender?
In all three cases, problems could have easily been avoided had my buyers planned ahead. All the policeman had to do was to make a photo copy of his check from the merchant before depositing it. How simple is that?
In the second case, I would have simply advised my buyer not to deposit the cash. Had she instead elected to use her garage sale money to buy gas and groceries over the next week or so, all problems would have been avoided.
And for the just-married couple, the ideal solution would have been to give all the wedding gift money to one of their parents. Then the parent could have written one single check along with a gift-letter. Simple, legal, and so much easier than trying to prove the source of a dozen or so different checks.
Remember the ‘Golden Rule’. He who has the Gold makes the Rules. In real estate, this is the lender who is funding the home purchase. So with just a little better understanding of the process, hopefully you can avoid some of the pitfalls.
Should you have other questions about the buying process, please feel free to contact me. If I can’t answer them, I have lenders I’ve worked with that I would feel comfortable referring you to.