Mortgage and Portfolio Loan Guide

Do you have to prove your savings to buy a home?

The Asset Piece of the Mortgage Puzzle

There you are, Mr. Hotshot at the blackjack table. You sat down with a hundred bucks, now you’re up two grand. You’re feeling good, top of the world really, and decide maybe it’s time to call it a night. You cash in your chips with a smile on your assets gamblingface thinking how proud your wife is going to be for the first time in years. Things have been a bit rocky since back in ’06 when you bought her that vacuum for Christmas. But not this time. Today you’re a winner. With these winnings in hand, you finally have enough money saved to move out of mom and dad’s basement and buy a house! Monday morning comes around, and you’re devastated. Your buddy at Easy Peazy Funding has to break it to you that the $2,000 deposit that you made into your bank account needs to be sourced if you want a mortgage. There needs to be a paper trail proving where that cash came from. You’re confused because there is no way to prove you made that money from using mind power, and pure skill. When the denial letter comes in the mail your wife kindly throws your clothes into the front yard. She leaves a note saying something about California, and heading west. The rest is history.

Depressing right? Let’s try to make sure you’re doing all the right things to prepare for buying a home. In this portion of the “keeping your home loan process simple” series, the asset piece of the mortgage puzzle is given to you in a gift basket.

When you’re purchasing a home, get all of your financials in one place so they are easily accessible. You’ll need funds for down payment, escrow account (for taxes and insurance), closing costs, and general reserves. Along with all of your pay information, you’ll need bank statements, retirement statements, brokerage account statements, and proof of any other account you’re using to qualify.

Bank statement

  •  Be ready to provide 2 months consecutive bank statements, including all pages. If it says page 2 of 6 anywhere on the assets for mortgagepage, provide all 6 pages.
  • Make sure that your statement shows your name, address, bank name/logo, account number, balances, and activity on the account. If any of those items are missing you’ll need to provide more information. Many times an online print-off will show your account number, but not your name.
  • Non-sufficient fund (NSF) fees will be evaluated. If you show a habit of having NSFs, your lender may decide that pattern is an indication that you’re not ready to buy a home.
  • If the statement you provide is a shared account (someone other than you is also on the account), the individual you share the account with will need to provide a letter confirming you have full access to the funds.
  • Large deposits need to be sourced. If there are any deposits on your bank statement other than your normal income; you will need to provide a paper trail proving where those funds came from. All jokes aside, you may actually be able to use gambling winnings if the casino provided a slip or coupon confirming the amount won. If you sold a vehicle or jewelry you’ll need a bill of sale. Don’t accept cash from the buyer, ask for a check. Additionally, you’ll need to provide a 3rd party opinion (kelley blue book for example) of value in order to confirm the sale price was not unreasonably higher than fair market value. This is to prevent fraud. So Johnny can’t sell his ford escort to his “neighbor” for $10,000. There might be something fishy going on there in the eyes of your lender.

Retirement and Brokerage Accounts

  • If you’re liquidating retirement funds you should be able to print off a most recent quarterly statement. If you are taking out a loan against your 401k your lender will factor that liability into your debt-to-income ratio. In some cases you may have an additional tax penalty if you withdraw retirement funds prior the being 59 1/2.
  • Above and beyond a recent statement, you’ll need to provide proof the funds needed for closing have been liquidated. You’ll also need to show where those same funds were deposited into. It’s wise to deposit those funds into the same bank account that you’ve already provided statements for. The goal is to keep it simple, so putting those funds into a different account could open a new can of worms.

Gift Funds

It’s acceptable to receive gift funds to help with down payment. Each loan program has it’s own guidelines pertaining to gift funds, but here are a few general points to keep in mind:gift from family
  • The person “gifting” the funds needs to be a family member, or someone with an obvious close personal relationship (like a fiance).
  • You both will need to sign a letter confirming the amount and purpose of the gift funds. The letter will also need to confirm there is no expectation of repayment to the donor (the person gifting the funds). They will also need to show their ability to gift the funds by providing 2 months bank statements.

  Grants

Some states and communities offer grants to assist homebuyers with down payment. As long as the entity providing the grant is credible, the lender should accept the grant as an asset because typically a grant does not require repayment. Some grants require a homebuyer course to be completed by the borrower prior to being eligible for the grant. This is to ensure the individual is aware of the pros and cons of homeownership.
There are many unexpected expenses when buying a home. Cash is king, have your assets in place. Aside from lender requirements there are so many things to consider. Carpet, fence, paint, new locks, blinds, and so much more. If you feel like every penny is being scrutinized by your lender, you’re probably right, and it’s truly for your protection. If you feel like things are getting a bit too tight, it might be best to reconsider your price range.


A couple closing tips… 

Bank statements are valid for 60 days. If you’re house hunting for 5 months, send your lender new bank statements as they become available.

Do not overextend yourself. There will always be something that comes up that never crossed your mind. Leave yourself a cushion for those expenses so you can sleep at night.

make sense mortgage

How Much Home Can You Afford?

What Mortgage Can I Afford?

So let me get this straight; you make $300,000 annually, but you show Uncle Sam that your income is below the poverty line? Sure, no problem, let’s get you that 2nd home on the beach!

Yes that example may be a little extreme. However, this is something that constantly comes up with potential homeowners. In Part 3 of the “keeping your home loan process simple” series; the income piece of the mortgage puzzle is laid out in plain text.

Here is the short of it: Show a recent 2 year consistent income on your tax returns, and prove you’re still receiving that compensation. There you go, no need to keep reading, unless of course your circumstances aren’t quite that simple.

The truth is that even if you’re a salaried employee with a fortune 500 company; in some cases it can still be a challenge to prove your income, and how you’re compensated. This should help you answer the question “what mortgage can I afford”.

Income basics

If you’re employed you can be sure you’ll be asked for the following: Most recent 2 years federal tax returns (all pages), mostBrighton, MI

recent 2 years W-2s (1099’s if applicable), and most recent 30 days worth of pay stubs. You may not always be asked for your tax returns, but it’s best to provide them up front in order to reduce any last minute surprises.

  • Pay stubs should show: the same employers name or entity as the W-2, your name, taxes withheld, and pay rate.
  • If you are using overtime, bonus, or special incentive pay to qualify your employer will need to break down that pay separate from your salary (or hourly) pay. They will also need to confirm in writing how much of that type of income you have received in the last 2 years, and how much you’ve received so far in the present year. This helps the lender to gain an understanding of how consistent, and stable that income has been for you historically.
  • For commission income you’ll need to provide a 2 year history as well. Additionally, your tax returns will get examined in more detail to confirm you didn’t have any employment writeoffs which may offset your income. This can be more common with commission folks.
  • Your lender will order your tax transcripts from the IRS. The purpose is to verify that the IRS shows the same figures as the tax returns you provided.

Self-employed

If you have ownership interest in a company you’ll need to provide at least 2 years most recent federal tax returns (all pages). If you file business tax returns be ready to provide those as well. Your accountant will need to provide a P&L (profit and loss statement) if you happen to be applying for a home loan in the month of April or later in the year. Your P&L states how the company is performing for the year so far. Your P&L gives the lender a picture of how your income (or loss) looks in comparison to previous years. Again, your lender is looking for stability and consistency (or lack there of).

Debt-to-income ratio

michigan mortgage lenderYour monthly liabilities divided by your monthly verifiable income equals your debt-to-income ratio. The liabilities that are considered in this figure are the payments shown on your credit report, property insurance/taxes, alimony/child support owed, and any other legally binding payment. It’s best to do what you can to put yourself in a position to be at or below 43% debt-to-income ratio.Example… Mr. Homeowner has a car loan and credit card; combined payments are $250/month. His mortgage payment including taxes, insurance, and mortgage insurance is $1,100/month. Mr. Homeowner is an engineer with a $60,000/year salary. Mr. Homeowner’s debt-to-income ratio looks like this: 1,350 / 5,000 = .27, or 27%.

Beyond basics

Rental property – 2 years most recent federal tax returns, proof of property taxes and homeowners insurance. Your credit report will show your mortgage payment. If you have your taxes and insurance escrowed (included with the monthly payment) provide your mortgage statement.

Investment income and capital gains – 2 years most recent federal tax returns. Your lender will evaluate consistency, and likelihood of continuance.

Alimony/Child support – You’re probably shocked, but some ex-spouses fail to pay court ordered alimony or child support. For that reason you’ll need to show proof you have been receiving consistent payments for at least 6 months. Also have the full divorce decree ready, and any other updated court documents addressing any changes.

Social security retirement – Current year award letter from social security which states the amount of monthly compensation you’re entitled to. Also a good idea to provide 2 months bank statements showing the deposits received from social security.

Social security permanent disability – If social security has deemed you to be permanently disabled you will have an award letter confirming such compensation. You may also be required to provide a recent letter from a physician confirmingmichigan mortgage lender the state of your condition and the likelihood of the condition to change.

Short term disability – Short term disability will be most likely ineligible to use to qualify for a mortgage because of the uncertainty of continuance.

Pension/retirement – Some pension plans will provide a pay stub and W-2; similar to what you received when you were working. If so, that should be simple enough to verify. If you’re receiving income from an annuity, IRA, or 401K you’ll need to prove it. It would be a good idea to have your most recent quarterly investment statement handy; along with 2 years tax returns. The investment statement you provide will help track your draw (income) history, but also give an indication as to how long that income is likely to continue. The remaining balance should be at least enough to sustain the same draws for 3 years.

VA disability – After being discharged from the armed forces; a veteran may be entitled to disability compensation for injuries sustained while in service. Similar to social security disability; you’ll have an award letter issued to you stating your compensation benefits. The VA has gotten much better in the last few years on requests for a new letter or verification of the status. More on VA and veteran benefits coming soon.

Unemployment – Typically, if unemployment is reported on your tax returns you’ll need to explain in writing why you were receiving unemployment. If you’re in a seasonal line of work like landscaping, and you cannot work in the winter, that would be considered reasonable reason to consider using unemployment income to qualify. If you lost your job and couldn’t find employment for a year; the unemployment compensation you received at that time wouldn’t be considered as stable.

Part time – You must demonstrate a 2 year history receiving consistent hours and pay.

Higher education – You can use the time spent while in college or trade school as part of your 2 year history. The time in higher learning will be considered if you can provide transcripts or a diploma. If school is part of your 2 year history; the only income considered for your new employment will be salary/hourly income in a full time position.

Under the table – Waiters and bartenders tend to not claim all tips received on their tax returns. Any job that you have that is paid under the table will not be considered.

Letters of explanation – When your situation is unique, and you have an opportunity to tell the story, take that opportunity seriously. Be detailed in why it took 4 months to find a job, or why your relocation to another state will not have a negative impact on your income. You’re painting a picture for your lender. You’re helping them put together the puzzle.

Verification of employment – Your lender will reach out to your employer to make sure you actually work there. While your loan is in process, and right before closing your loan your employment status will be verified. This is also an opportunity to have your commission, bonus, or overtime income verified. Things can get sticky if your employer refuses to break down your salary income from other compensation in detail.

What’s the name of the game? If you said consistency coupled with stability; you’d be dead on. Of course the ability to provide relevant documentation to support everything puts the icing on the cake.

A few tips to end with for now…

Your tax returns show unreimbursed business expenses on you schedule A. Take a look at those before you turn your tax returns in to your lender even if you’re not a business owner. A mechanic at a dealership could claim unreimbursed expenses for uniform costs throughout the year. Often times unreimbursed business expenses can cause a last minute issue if they are initially overlooked. Claiming that type of write-off could have an impact on your debt-to-income ratio.

If you have taken out a 401K loan against your employer’s retirement plan there will be an item on your paystub that with address that. Since it’s a loan you’re paying back, that liability would have to be considered in your debt-to-income ratio. If your total vested balance in the 401K exceeds the amount of the loan you have against it; you may be able to exclude that liability from your debt ratio. Have your most recent quarterly statement handy to show your balance.

Having the last pay stub (December 31st pay stub) for the previous two years will often be an easy way to verify how much bonus, commission, and overtime income you received in the previous years.

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